The Impact of Corporate Culture on Company Mergers
Who can ever forget the spatial distribution of personalities during lunch in the school cafeteria? The table turf of "preppies," "geeks," "jocks," and so on? Such groups persist because individuals who exhibit similar qualities are continually folded in, or in an effort to be accepted, willingly conform to established conventions. Visible and behavioral cues make it readily apparent who is "in" and "out" of a particular crowd, despite a lack of formal structure. Unknowingly perhaps, these students have created organizational cultures.
Companies are similarly driven by their own kind of organizational culture. Known as "corporate culture," it is deliberately expressed through a variety of forms such as architecture, workplace fashion, institutional structures, jargon, and title nomenclature. At Caltech, social scientists conduct behavioral economics experiments to demonstrate the measurable influence of corporate culture in companies, and then use this information to predict corporate compatibility in mergers.
Organizational Culture
According to Colin F. Camerer, the impact of culture in the corporate environment is becoming increasingly important. Effects can be positive, as evidenced in the cases of WalMart, UPS, and Southwest Airlines. Employees of Southwest, for example, actually accept lower wages than their industry counterparts in order to be part of the "fun" working environment created by Southwest's "People Department" motto: Hire for Attitude, Train for Skills. Cultures of obscurity and distrust, however, can have a negative effect on company performance such as recently observed at Enron and WorldCom.
To an economist like Camerer, it is irresistible to take an approach to corporate culture that anthropologists call "functionalist." Functionalists try to understand a culture and its persistence by isolating elements and examining them from the standpoint of functionality -- such as how a particular company's culture enhances economic efficiency or worker satisfaction. Its effectiveness can also be measured by observing how it resolves coordination problems by telling workers what they should do when clear rules do not exist specifying employee action in the face of unforeseen circumstances. Yet how is culture measured precisely in the field?
Experiments in Code
One way to study organizational culture is to create it in the laboratory and explore its properties. Camerer and his researchers have focused on the communication aspect of 'codes' - in particular, slang - because they are easy to "grow" in the lab and study. "Stat" and "NPO" are examples of codes used in emergency rooms where it is critical to communicate highly-specialized information with precision and conciseness. Other observable codes are the slang of teenagers, mobsters, and rappers ("whatever," "fuggedaboutit," and "benjamins"=money), government acronyms, academic jargon, and phrases. In their innovative research, experimental subjects are observed as they create specialized homemade languages which are used to rapidly communicate within organizations. For instance, the phrase "does he drink the Kool-Aid?" is used at Microsoft as a measure of corporate loyalty, alluding to the use of Kool-Aid to dispense cyanide in the 1978 Jonestown Massacre. Unlike other aspects of business culture like mission statements and priorities, codes like these are easy to synthesize and measure in the laboratory.
In Camerer's tests, the subjects are given a set of identical pictures and are paired up as "manager" and "employee." These pictures are of complex office environments involving people, objects, and activities -- each similar in content yet distinct in composition. In each round of the experiment, the manager is given a "correct" sequence of pictures. The manager must communicate this information as quickly as possible to the employee, whose pictures are arranged in a different order, only by describing features of the pictures. While performing the task, the subjects can freely talk back and forth with each other, but are separated by a partition to prevent any other forms of communication. The objective is for subjects to develop a common language to accurately identify pictures in the shortest time possible.
This results in a tacit, shared understanding that is similar to corporate culture in a simple form. Like cultural practices, the internal language is an important source of the "firm's" efficiency (the ability to communicate which pictures to select rapidly) and also a source of potential cultural conflict (players using different codes choose more slowly.) Like culture, the homemade language arises endogenously through shared experience, so it is likely to be idiosyncratic and differ between firms - even though each firm's language may be equally efficient. "Good" cultural codes pick out the special features of each picture, are brief, and are often memorable. For example, different subjects described the Figure 1 office scene as "cubicles," "headphones," and "telemarketers." In another picture, a businessman is gesturing at a meeting with his hands outstretched. One group called this picture "Macarena" because the outstretched hand gesture resembled one move in the faddish 1990's dance of the same name.
Modeling Corporate Mergers in the Laboratory
Errors in judgment when merging large corporations can be colossal, as in the recent $40 billion loss suffered by culturally-polarized Time-Warner and AOL. Is it really a surprise that market analysts tightly focused on the additive value of the two company's assets failed to predict the problems inherent in marrying a culture of tradition and a vertical chain of command, with a culture of youth, spontaneity, and lateral power distribution?
One experiment studied how conflicting cultures may cause inefficiencies in corporate mergers. Camerer and Roberto Weber (Carnegie-Mellon) conducted twenty rounds of tests on two pairs of subjects, each subject alternating in his/her role as manager or employee. The left part of Figure 2 shows the amount of time it took pairs of subjects to complete the task. Note that while initially the completion time was high (average time = 249 seconds), the time decreased considerably by round 20 (average time = 48 seconds). Next, the two pairs were merged, forming fixed groups of three: one manager (from the "acquiring firm") and two employees (one from the "acquiring firm" and one from the "acquired firm"). The acquiring manager then participated in the same task as before - now communicating simultaneously with two employees - for 10 rounds. As the right hand side of Figure 2 shows, "merging" two laboratory firms led to persistent decreases in efficiency due to the difficulty of establishing a common language. The average completion time increased from 48 seconds in the last pre-merger round to 130 seconds in the first post-merger round. This is purely because of the differences in "cultures."
Real World Implications
The impact of organizational culture on mergers can have profound implications in real world markets. This is why Camerer would like to see a kind of "merger compatibility" test designed which would help firms determine whether or not their corporate cultures are compatible. Enormous losses in key personnel, "down" time, and stock value have recently been seen during the first year of companies formed by culture-blind mergers. Failures like these can be avoided if a simple test were self-administered by companies (not by fee-driven investment bankers) during that window of opportunity before the announcement is made, when direct and objective feedback is welcome. This pattern is also seen in failed marriages that suffer immeasurable emotional losses when compatibility in long-term values and conflict resolution is not confirmed prior to a buoyant engagement. Other interesting issues Camerer would like to address include: Are "strong" cultures always better, or are they slower to adapt to change? Is a charismatic founder necessary, or distracting, to a company's success, and how long does his/her influence persist?
Just as the temptation to bring together the brainy "bookworms" and savvy, neatly-groomed "preppies" to run a school newspaper may not lead to the production of good, solid journalism; neither will the sum value of merging lucrative companies alone lead to business growth. Human organizations are influenced by human behavior, and cannot be simply and predictably added together. Through experimental work, Caltech researchers have shown how an analysis of corporate cultures - and the highly relevant, yetoften overlooked qualitative information it brings to the process - is a critical tool in the evaluation of future mergers.