JACOBS UNIVERSITY BREMEN      The role of cultures in      international mergers Exploring the reasons for Daimler-Chrysle...
ContentsI.        Introduction...............................................................................................
I.      IntroductionInternational mergers’ success correlates directly with the level and quality of the planning involved...
Table 1: Hofstedes Model of Culture    1. Power distance: Degree of inequality among people which the population of a coun...
Table 2: Culture Dimension Scores for Ten Countries                                          Source: (Hofstede, 1993, p. 9...
Three years later DaimlerChryslers market capitalization stands at $44 billion, roughly equal to the valueof Daimler-Benz ...
When applying Hofstede’s model of culture to the DaimlerCrysler merger, it could be observed hownational culture can form ...
BibliographyClemente, M.N., Greenspan, D.S. (1999). Culture Clashes. Executive Excellence, 1-34.Darling, J., Seristö, H., ...
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The role of cultures in international mergers: exploring the reasons for Daimler-Crysler's failure

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The role of cultures in international mergers: exploring the reasons for Daimler-Crysler's failure

  1. 1. JACOBS UNIVERSITY BREMEN The role of cultures in international mergers Exploring the reasons for Daimler-Chrysler’s failure Mariya Arnaudova 1/17/2011Intercultural Competencies for Leaders in Business Fall 2010: Prof. Dr. Anja Zimmermann
  2. 2. ContentsI. Introduction.......................................................................................................................................... 2II. Conceptual Framework for Culture: Hofstede’s Cultural Constraints in ManagementTheories ....................................................................................................................................................... 2III. Daimler-Benz and Chrysler Corporation Merger ....................................................................... 4 1. Business background and reasons for the merger ................................................................... 4 2. Reasons for the Merger’s Failure: Culture Clash ...................................................................... 5IV. Critical Reflections: Making International Mergers Successful ............................................... 6Bibliography .................................................................................................................................................. 7 1
  3. 3. I. IntroductionInternational mergers’ success correlates directly with the level and quality of the planning involved. It iscommon for companies to forego an objective analysis of their strengths, weaknesses, opportunities andthreats (Nguyen, Kleiner, 2003, p. 447).However, a majority of corporate mergers fail in various aspects: fall of stock prices after mergingactivities, lower profitability compared to pre-merger period or little business synergies compared toexpected ones.One major reason pointed out in research is the insuficient attention paid on the integration phase ofthe merging companies with respect to culture differences that exist (Nguyen, Kleiner, 2003, p. 400).The incompatibility between the merging oirganizations’ cultural norms, beliefs, and values turn out tobe underestimated and then lead to merger’s failure (Clemente, Greenspan, 1999, p. 12).Consequently, this paper will critically analyse the role of culture as a factor for success in internationalmergers. First, the paper will provide a brief summary of theoretical concepts (e.g. Hofstede’s model ofculture) which will later be applied to a case study of a famous international merger between Americanand German companies. As a vivid example, the paper will review briefly the business reasons that leadto the merger of two giants in the international automobile industry – the German-based Daimler-Benzand the American-based Chrysler Corporation (Darling, Seristö, Gabrielsson, 2005, p. 343) and criticallyanalyse the reasons which led to the merger’s failure. Finally, the paper will provide critical reflectionson the importance of awareness of cultural differences and give brief recommendations for therealization of international mergers. II. Conceptual Framework for Culture: Hofstede’s Cultural Constraints in Management TheoriesGlobalized markets for goods and financial services, global media structures and migrant flows have ledto an exponential increase in the processes of cultural exchange. Local cultures are changing and arecombining with others in new and unusual ways. The boundaries between what is known and what isforeign are becoming increasingly blurred. Moreover, social forms around the globe have becomeculturally heterogeneous: what once was foreign can now be found next door (Deardorff, 2006, p. 6).Therefore, “culture is perceived not as a static, hermetically sealed system, but as a current of meaningsthat continually dissolves old relationships while establishing new ones” (Zukrigl, Breidenbach, 2000).The word “management” is an American invention but in other parts of the world not only the practicesbut the entire concept of management may differ, and the theories needed to understand it, maydeviate considerably from what is considered normal and desirable in the USA (Hofstede, 1993, p. 81).In order to explain the differences in management, Hofstede develops a model in which worldwidedifferences in national cultures are categorized according to five independent dimensions. The positionof a country on these dimensions allows scientists to make some predictions on the way their societyoperates, including their management processes and the kind of theories applicable to theirmanagement. Table 1 gives more details about Hofstede’s model: 2
  4. 4. Table 1: Hofstedes Model of Culture 1. Power distance: Degree of inequality among people which the population of a country considers as normal.Relatively equal (small power distance) Extremely unequal (large power distance) 2. Individualism: Degree to which people in a country prefer to act as individuals rather as members of a group.Collectivism: low individualism; societies where Individualism: children learn very early to think ofchildren learn to respect the group to which they themselves as "I" instead of as part of "we". Theybelong (usually the family) and to differentiate expect one day to have to stand on their own feetbetween in-group members and out-group and not to get protection from their group; andmembers. When children grow up they remain therefore they also do not feel a need for strongmembers of their group, and they expect the loyalty.group to protect them when they are in trouble. Inreturn, they have to remain loyal to their groupthroughout life. 3. Masculinity vs. FemininityMasculinity: tough values like assertiveness, Femininity: tender values like the quality of life,performance, success and competition which in maintaining warm personal relationships, service,nearly all societies are associated with the role of care for the weak, and solidarity, which in nearlymen, prevail over tender values all societies are more associated with womens roles 4. Uncertainty Avoidance: degree to which people in a country prefer structured over unstructured situations.Structured situations: clear rules as how one In countries which score low uncertaintyshould behave exist. These rules can be written avoidance, people are more easy-going anddown, but they can also be unwritten and imposed flexible. The feeling that prevails is "what isby tradition  people tend to show more nervous different, is curious."energy; A (national) society with stronguncertainty avoidance can be called rigid;The feeling that prevails is "what is different, isdangerous." 5. Long-term vs. Short-term OrientationLong-term orientation: one finds values oriented Short-term orientation: one finds values rathertowards the future, like thrift (saving) and oriented towards the past and present, likepersistence respect for tradition and fulfilling social obligations Source: (Hofstede, 1993, pp. 88-90)Table 2 lists the scores on all five dimensions for the following ten countries. The table shows that eachcountry has its own configuration on the five dimensions. The scores illustrate that people in othercountries may think, feel, and act very differently when confronted with basic problems of society. 3
  5. 5. Table 2: Culture Dimension Scores for Ten Countries Source: (Hofstede, 1993, p. 90) III. Daimler-Benz and Chrysler Corporation MergerThe DaimlerChrysler merger, as will be shown in this analysis, was not an ordinary merger. This mergerhad embedded within it the existence of two very strong yet different organizational cultures that wereexpected to become integrated to facilitate achievement of the goals and objectives of the mergedcross-cultural global enterprise. Failure to successfully integrate the two cultures gave rise to a crisis thatended the existence of DaimlerChrysler (Darling, Seristö, Gabrielsson, 2005, p. 345). 1. Business background and reasons for the mergerOn 6 May 1998, the German car maker Daimler-Benz AG and America’s third largest automobilecompany Chrysler Corporation signed a merger agreement to build the world’s fifth biggest automaker.Juergen Schrempp, CEO of Daimler-Benz, and Robert Eaton, Chrysler’s then boss, saw a logical fitbetween the European luxury car producer and the American maker of sporty-utility vehicules, minivansand medium-sized vehicles. The complementing product and geographical match seemed to prepare themerged DaimlerCrysler AG for the future competition in the automotive industry (Wolf, 2005, p. 2).The merger marked the beginning of the ambitious goal of mering two styles of auto-making, twoapproaches to business and the proud but distinct cultures of two nations. The opportunities forsignificant synergies given by a combination based on factors such as shared technologies, distribution,purchasing and know-how. Daimler’s engineering skills and technological advances could becomplemented with Crysler’s skills for innovation, speed in product development and bold marketingstyle (Johann, 2006, p. 3). 4
  6. 6. Three years later DaimlerChryslers market capitalization stands at $44 billion, roughly equal to the valueof Daimler-Benz before the merger. Its stock has been banished from the S&P 500 index, and ChryslerGroups share value has declined by one-third relative to pre-merger values. 2. Reasons for the Merger’s Failure: Culture ClashAlthough DaimlerChryslers Post-Merger Integration Team spent several million dollars on culturalsensitivity workshops for its employees on topics such as "Sexual Harassment in the Americanworkplace" and "German Dining Etiquette," the larger rifts in business practice and managementsentiment remain unchanged.James Holden, Chrysler president from 1999 until 2000, described what he saw as the "marrying up,marrying down" phenomenon. "Mercedes [was] universally perceived as the fancy, special brand, whileChrysler, Dodge, Plymouth and Jeep [were] the poorer, blue collar relations" (Grässlin, 2000, p. 162).The dislike and distrust ran deep, with some Daimler-Benz executives publicly declaring that they "wouldnever drive a Chrysler" (Oldag, 2001, p. 12).With such words flying across public news channels, it seemed quite apparent that culture clash hasbeen eroding the anticipated synergy savings. Much of this clash was intrinsic to a union between twocompanies which had such different wage structures, corporate hierarchies and values. At a deeperlevel, the problem was specific to this union: Chrysler and Daimler-Benzs brand images were foundedupon diametrically opposite premises. Chryslers image was one of American excess, and its brand valuelay in its assertiveness and risk-taking cowboy aura, all produced within a cost-controlled atmosphere.Mercedes-Benz, in contrast, exuded disciplined German engineering coupled with uncompromisingquality. These two sets of brands, were they ever to share platforms or features, would have lost theirintrinsic value. Thus the culture clash seemed to exist as much between products as it did amongemployees (Tuck School of Business, 2002, p. 5).Table 3 shows the main points of conflict between the two cultures: Table 3: Sources of Conflict Daimler Crysler Corporate StructureHierarchical Structure Tem-oriented Corporate CultureManagement processes of planning, organizing and Setting goals, directing and monitoring implementation.controlling. More conservative, efficient and safe Known as the risk-taking underdog Corporate PropositionThe driving image and experience associated with the Attractive, eye-catching design at a very competitivehighest quality available in the market price Value ChainEmphasis on engineering, design, quality and after High volume, low cost manufacturing and distributionsales service LeadershipJürgen Schrempp - with independent personality and Robert Eaton - broke the Chrysler tradition ofSouth African overlay commanders 5
  7. 7. When applying Hofstede’s model of culture to the DaimlerCrysler merger, it could be observed hownational culture can form organizational one: more Individualistic Americans, with much higher PowerDistance than in Germany, with less Uncertainty Avoidance formed organizational culture with image of“assertive cowboy with strong accent on efficiency” at Crysler. This did not correspond to the style ofDaimler-Benz which was known for its methodical, centralized decision making and high regard fortradition and hierarchy; its philosophy was “quality at any cost.” IV. Critical Reflections: Making International Mergers SuccessfulThe reality of merger and acquisition transactions in today’s global business world is that they arealways complex and made more difficult by the fact that each party has unique behavioral patterns thatdefine its culture reflected in Hofstede’s model of culture.For a business transaction to achieve the outcomes expected it is necessary to acknowledge the impactthat behavior patterns have on the probability of the transaction’s success – but this is only the startingpoint. Mitigating the negative impact of culture on a deal, or accelerating the development of theculture necessary for success, requires adhering to a structured process. Moreover, it’s very importantto those who will be in charge either of whole merger or acquisition or particularly of the culturalintegration, to be aware of national culture pattern. Understanding of how national culture affectsorganizational one is critical skill for managers, as well as understanding of impact of organizationalculture on mergers or acquisition transactions.In the case of DaimlerCrysler shareholders and top-managers of both companies paid a lot of attentionto rationality and strategic goals, they understood clearly what they wanted in financial and marketterms, but they did almost nothing with culture aspect after acquisition and they hadn’t defined “cultureacquirer” before the deal was done.Therefore, it might be of advantage to perform a cultural analysis of the companies involved in themerger to see where their compatibilities and differences lie. The cultural analysis is a tool foridentification and overcoming of cultural differences between partners in mergers. A detailed analysisshows differences and common grounds between the people of both organizations. Thus, it allowsimproving interaction and communication. Moreover, it is vital to harmonize and communicate all otherelements that influence culture, such as reward systems and systems for performance appraisal. . If thisis done carefully mergers can become very successful and can actually be the best way to enter a foreignmarket at the foreign company can benefit from the cultural knowledge and fit of the host company andthus avoid the typical common ‘newcomer’ mistakes. 6
  8. 8. BibliographyClemente, M.N., Greenspan, D.S. (1999). Culture Clashes. Executive Excellence, 1-34.Darling, J., Seristö, H., Gabrielsson, M. (2005). Anatomy of Crisis Management : a Case Focusing on a Major Cross-Cultural Clash within DaimlerChrysler. Helsinki: Liiketaloudellinen aikakauskirja.Deardorff, D. (2006). Bertelsmann Stiftung Theses. Retrieved January 16, 2011, from Bertelsmann Stiftung: http://www.bertelsmann- stiftung.de/bst/de/media/xcms_bst_dms_18255_18256_2.pdfGrässlin, J. (2000). Jürgen Schrempp and the Making of an Auto Dynasty. New York: McGraw-Hill.Hofstede, G. (1993). Cultural Constraints in Management Theories. Academy of Management Executive, 81-94.Johann, R. (2006). Cross-Cultural Management: The Case of the DaimlerCrysler Merger. Norderstedt: Grin Verlag.Nguyen, H., Kleiner, B. (2003). The Effective Management of Mergers. Leadership & Organization Development Journal, 447-454.Oldag, A. (2001, March 17). Spiel mit dem Feuer. Sueddeutsche Zeitung, p. 12.Tuck School of Business. (2002). Tuck School of Business: DamilerCrysler Merger. Retrieved January 17, 2011, from Tuck School of Business at Dartmouth: http://mba.tuck.dartmouth.edu/pdf/2002-1- 0071.pdfWolf, T. (2005). The DaimlerCrysler Merger - One Company, Two Cultures. Norderstedt: Grin Verlag.Zukrigl, I., Breidenbach, J. (2000, March). : Parallele Modernen. Kampf der Kulturen oder McWorld. Deutschland. Auslandszeitschrift der Bundesrepublik Deutschland. 7

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