Sunday, October 1, 2006

The Key to a Successful Merger of Cultures? Look at Employee Demographics

STANFORD GRADUATE SCHOOL OF BUSINESS—You're a manager in a company that has recently merged. Despite aggressive coaching to help your employees understand and embrace a new corporate culture, you have some employees who are unwilling or unable to change their behavior. The success of the merger hinges on the employees from both organizations making a smooth transition to the new way of working. What do you do?

According to a new book from Glenn Carroll, the Laurence W. Lane Professor of Organizations at the Stanford Graduate School of Business, making it clear to such employees that they do not fit in—and thereby encouraging them to leave of their own accord—is an effective way to build a homogenous and harmonious organization.

The recommendation sounds harsh. "Although the implication of this finding for managerial policy is straightforward, it should be treated with caution—it is based on specific assumptions in a theoretical model. It is also only one of several effective demographic factors to merge the cultures; other options might be more attractive," says Carroll, whose book Culture and Demography in Organizations was published this year by Princeton University Press.

And the stakes are high. Although financial or strategic goals are usually the publicly stated reasons for most mergers or acquisitions, the success of any given one often depends heavily on the ability of the two firms to integrate their workforces into a unified whole. A merger can fail for any number of reasons, says Carroll, but cultural differences are increasingly thought to be a major cause of post-merger dysfunction.

Examples abound of merged organizations that failed to come together culturally. There's the merger of Compaq and Digital Equipment Corp. that was unsuccessful largely due to a culture clash that pitted Compaq's high-volume, fast-to-market strategic focus against DEC's more convoluted and lengthy sales cycles. Indeed, the business challenges created by the culturally troublesome merger are viewed as a reason that Compaq lost its position as the No. 1 computer maker to Dell, its longtime competitor.

"These problems can linger on for years after the merger has been completed," says Carroll. "Failing to successfully integrate the cultures is a very serious thing."

Talk about integrating two corporate cultures typically revolves around "cultural content"—the norms, beliefs, and values that lead to general descriptions of the firms such as bureaucratic, entrepreneurial, free-wheeling, or conservative. The predicted success or failure of any given merger is based upon an analysis that takes this cultural content into consideration.

"The problem is that people can make up any number of stories that can justify any type of merger," says Carroll. "You'll hear that a merger will be successful because two organizations are very similar in their cultural content. Another merger will be hailed as a good one because the organizations' cultures are so different, and will therefore complement each other."

As a result, Carroll and his co-author, J. Richard Harrison of the University of Texas, Dallas, reasoned that it would make sense to analyze cultural integration by looking at the demographics of the merging organizations. Demography is the study of population dynamics. Carroll and Harrison developed a demographic model of culture that encompasses a host of factors, including the growth rates of the firms, the selectivity of the hiring processes, the type and extent of socialization that occurs once employees are members of the organization, the rates of employee turnover, and the degree of alienation felt by employees.

Hiring selectivity refers to how carefully management selects new workers who fit into the culture. Selectivity can include personality testing as well as extensive interviewing by multiple employees—both peers and management—before a candidate is hired.

Socialization refers to how employees are indoctrinated into the new corporate culture. This can involve the pressure exerted by colleagues on each other to adapt to the new organization—or socialization by management, which can include such things as incentive bonuses, training classes, and corporate retreats.

Finally, alienation is the degree to which employees who don't fit in come to leave of their own volition. Either peers or management could ignore the employee in question, or give him or her difficult or unpleasant assignments until the employee simply quits.

Although the success of post-merger cultural integration is influenced by many demographic processes, the strongest effects seen in the Harrison-Carroll model are associated with hiring selectivity, management-based socialization, and alienation, Carroll says. Although alienation was found to be a strong factor, says Carroll, it wasn't the only one.

"The demographic way of thinking about mergers and acquisitions could be very useful to firms considering such a step," says Carroll. "It provides a whole new set of insights."

Related Information

Culture and Demography in Organizations, J. Richard Harrison and Glenn R. Carroll, Princeton University Press, 2006.