Hrm For Cultural Integration Management Essay
Mergers and acquisitions have been popular and quick means for companies to achieve market expansion in global business environment. Starting from in 1980s, the number of worldwide M&A transactions in a year has increased and pointed to 50,000 during 2000’s (Thomson Financial, Institute of Mergers, Acquisitions and Alliances (IMAA) analysis, 2011). Statistics prove that M&A is one of the most used strategies for a firm’s future growth or better performance. However, being popular does not always mean being effective when we look at M&A results. Many researches on this topic argue that more than 50% of M&A transaction turns out to be unsuccessful. There might be several reasons to account for this failure. M&A researchers have attributed the failure to difficulty of integrating two different cultures and employees at the integration phase (Schweiger, 2002). Conflicts between two different corporate cultures and values, and us vs. them mentality make lack of mutual understanding, and may cause disappointing collaboration. Situation is more difficult when it comes to international or cross-cultural M&A, As Hofstede (2001) analyzed, there is a clear pattern on the relationship between different national cultures and work-related values. Considering this fact, it makes more difficult situation that the gap between two different national cultures ahead of different corporate values and culture.
Companies make M&A deals for various reasons: to deal with overcapacity through consolidation in mature industries, to roll-up competitors in geographically fragmented industries, to extend into new products or markets, as a substitute for R&D; and to exploit eroding industry boundaries by inventing an industry (Bower, 2001). Different strategic intention of M&A may trigger different concerns for a firm. However, one thing in common on M&A with diverse objectives is that cultural differences -whether it is corporate or national- significantly matters, and more importantly, all is dealt with by and related to the people. It is obvious that there are many human resources issues involved when two organizations merge into one company across the borders. Here is the reason why focusing on human resource management (HRM) not only during pre-acquisition planning but also integration stage in international M&A is important for successful M&A.
The purpose of this paper is to examine the role of HRM for cultural integration in international M&A, and suggest recommendation for HRM in cross-border M&A. In the first part, why cultural integration matters in international M&A will be briefly analyzed with literature review. And then, based on several academic literatures the role of HRM in integrating cultures in cross-border M&A will be discussed in order of three main M&A stages; pre-acquisition planning, integration phase, and consolidation phase. After, research on two case studies of the companies with successful M&A strategies will be provided to substantiate the link between the right role of HRM for cultural integration in international M&A and successful performance of M&A, The paper will conclude with summary of critical points discussed and recommendation for HRM of two companies analyzed in case studies.
Cultural integration in M&A
Many researches on M&A have argued that integration stage in M&A process is the key to decided success or failure of M&A. Then, why integrating different corporate and national cultures are that much important? In fact, most of discussion on M&A occurs prior to a transaction. They are to figure out targeted company and negotiate good acquiring price. However, clash arises once the transaction is made. As Hofsted proved in his research (2001), national cultural differences such as power distance, individualism/collectivism, uncertainty, masculinity/femininity, and long term/short term orientation are applied to business scene, Even if there are a few researchers who have proposed that a moderate level of cultural differences are positively associated with the units possessing complementary capabilities and the extent of capability transfer between the two organizations subsequent to the acquisition (Bj6rkman et al., 2007), it is widely accepted that collision among different corporate cultures and values cause lack of collaboration and failed opportunities for organizational learning (Cartwright and Cooper, 1996). Supporting this idea, many executives have come to appreciate the importance of the roles integration and people play in the success of M&A and their ability to create value for investors (Schweiger, 2002).
HRM issues in M&A process
Figure 1: Schweiger’s key elements of integration process and general M&A process When it comes to integrating cultures, it is mostly said that integration process starts after the transaction is made. However, to accomplish complete and effective integration in M&A, the sooner HRM is considered, the better integration is realized. Simply saying, if a firm begins to integrate different cultures after a deal, it is too late to manage every HR issues in a right place in right manners. From assessing human capital sides of acquired company to retaining and assimilating competent employees, HR issues are actually involved in overall process of M&A. Generally saying, M&A takes three stages from pre-acquisition to integration and assimilation phase. Schweiger (2002) elaborated M&A process little more specifically with 5 processes: 1) strategic and financial objectives, 2) transaction stage, 3) transition stage, 4) integration stage, and 5) evaluation. To compare general three stages and Schweiger stage, it can be classified like the Figure 1 below.
1) HRM for cultural integration during pre-acquisition
Before M&A, a firm thoroughly assesses financial condition, future value, corporate culture, and many other facts of targeted company. In other words, due diligence is required to identify acquired company. In this stage, a company has to organize due diligence team which specialized in preparation of M&A. At the same time, easily neglected in many cases, assessing key people in targeted firm is critical for success of M&A. This includes assessing staff capability, leadership style, etc. By involving HRM in pre-acquisition stage, a company can figure out how to manage leadership and executive management of targeted firm, and plan how to retain competent human resources pool.
2) HRM for cultural integration during integration phase
Next, during integration phase lots of issues from compensation to determine decision making process must be considered especially when it is about international M&A. Merging two different companies with different cultural backgrounds means that both organizational culture and national culture must be taken into consideration. Common differences include different communication style, planning, decision making practice, negotiation strategy, and management and leadership style will cause conflict and anxiety which will require assimilation from one side or both(Shelton et al, 2003). Among these issues, two important HRM’s roles will be discussed below : Communication Style and Staffing.
Although one of the main purposes of international M&A is sharing techniques and information, sharing is sometimes deterred by different communication style. The frequency of executive meetings and methods of conveying messages vary from organization to organization, from culture to culture. These differences may generate temporary secrecy, which also generate anxiety and animosity among new company. Therefore, communication through open systems is necessary for informing employees about objectives about M&A, changes expected, and etc. The most desired communication systems might be operated openly both horizontally and vertically. This can be realized by followed methods. Horizontally, information should be exchanged frequently between multiple hierarchical levels ranging from managers to production staff (Cyr, 1995). For example, by weekly meetings and bulletin boards, employees at all levels can be easily conscious of “what is going on” in the company. Language difference is another aspect of communication style. Its importance is sometimes overlooked. However, minor misunderstanding resulted from lack of language skill might cause huge problem afterwards. So, being able to communicate in English, which is an international language is a basic requirement for successful international M&A.
Staffing is also an important HRM issue. Usually, new deployment of staffs including layoffs and recruiting for fulfilling strategic needs takes large parts in integration phase. Among those, role of manager is an important issue. The results of the research conducted in 1992 by Coopers and Lybrand show that out of 100 failed mergers, 85 cases are due to different management styles (Huang and Kleiiner, 2004). This is because top managers and executives involve not only in integration phase, but also from the beginning to the end of the M&A. Different management styles cause continuous struggle for seizing the initiative which can also cause confusion among other employees at lower levels. Moreover, senior managers who take huge possession of top executives tend to be too proud of their own culture from both nation and company. So, for one reason or another, we can say that dealing with negative emotions such as fear, confusion, and betrayal depends on management style. Therefore, manager and top executives in international M&A are required to meet several demands for proper leader. First, they must have cross-cultural management ability. For sure, the autocratic, manager-centered leadership style will deter the cultural connection (Janik, 2003). Instead, good conversation skills and interpersonal abilities are needed. Since they are dealing with totally different people and culture, they should be open-minded to new ideas. Secondly, executives have to be able to resist pressure from parent company who tries to take over and force new transition (Cyr, 1995). It does not mean to deter the integration process. It does mean that even if it is merged company, one should know their strengths and weaknesses and try to unlearn weaknesses while learning merits from new company, rather than throwing away everything.
Besides manager’s requirements, retention of staffs range from production line to top manager is another important issue in staffing. Because of anxiety of getting laid-off, companies face the problem of losing some talented workers. Company should be prepared with some good re-recruiting plan not to let people walk away. Moreover, external recruiting generates extra costs. These are some practical actions which management department can take. Most importantly, worker wants to take some responsibility. He or she would not take the position offered if its responsibility is less than before. It should be at least equal to last position or exceed sometimes. Next, after offering a new position, company can support mentoring service about new job requirements so that worker understands what he or she is doing and gets sense of stability. Finally, if company does not want to lose workers with great talent, economic incentives can be great motivation to keep that worker from moving out.
Last but not least in staffing section, managing new employees requires great attention. Even after careful recruiting process, we cannot guarantee that recruited employees will perform as they are supposed to. Workers need time to adjust to new systems, and some stimulants are needed for this. Schweiger (2002) illustrated 8 elements for motivating workers to carry out their works (Figure 2) .
Figure 2: Creating Capable and Motivated People (Source: Schweiger, 2002)
To do things differently
To do things differently
Clarify roles and responsibilities
Ensure adequate resources
Change structure systems, and processe
Change measurement and rewards systems
Provide performance and developmental feedback
Support training and development
Examine staffing and assignments
3) During assimilation phase
After companies go through all the pre-acquisition and integration process, finally they confront with the assimilation phase. This stage is as important as those two stages before, because time and money acquirer put would be waste if all these changes fail to settle. Moreover, the faster workers reestablish themselves into new situation, the better. Therefore, it is necessary that company to create the manual for quick consolidation. Each players’ roles for assimilation are different (Schweiger, 2002).
For Human Resources, training program and orientation should be prepared. This must include everything that workers might be looking for, from benefits and compensation to personal information such as contacts of certain department. Managers or supervisors are responsible for this assimilation for newly acquired employees. Finally, acquired employees themselves should be prepared for the training programs, and most importantly, must actively participate in re-training program to effectively assimilate new culture from acquiring company.
Case study 1: Doosan group’s M&A strategy
Doosan is South Korean conglomerate corporation. Established in 1896, currently the corporation holds 8 Infrastructure Support Business (ISB) companies including Doosan Heavy Industries and Construction, Doosan Infracore, Doosan Engineering and Construction, Doosan DST, etc. Doosan is creating 90% or more of its sales in ISB business through vigorous reorganization of business portfolio since 1998 (Doosan official website, 2012), and now evaluated as one of the most influential global ISB groups. The past 70% of business has concentrated on consumer goods such as food, beverages and leisure business service, but the corporation has successfully transformed their core business to the ISB that constructs and reinforces social infrastructure. For successful transformation of business portfolio, M&A has played critical role in transforming Doosan to global ISB corporation, and their unique M&A strategies focusing on HR issues are seen as a key factor for current success. Doosan is on work in 33 countries. It has over 37,000 employees. 28% of them are Korean and 42% are foreigners (estimated in 2009).
For last 15 years, Doosan has constantly acquired various domestic and foreign companies which have original technologies on infrastructure support business, or construction and engineering. The M&A history of Doosan is below.
Table 1: M&A history of Doosan Group (Source: Doosan official website, 2012)
2001, Acquired Hankuk Heavy Industry (currently Doosan Heavy Industries & Construction)
2003, Acquired Koryo Industrial Development (currently Doosan Engineering & Construction)
2005, Acquired Daewoo Machinery (currently Doosan Infracore)
2005, Acquired water treatment business of the AES of the U.S. (currently Doosan Hydro Technology)
2006, Acquired Mitsui Babcock UK, a British source technology company for power generating facilities (currently Doosan Babcock)
2006, Acquired Kvaerner IMGB, the largest materials company for power generation facilities in Romania (currently Doosa IMGB)
2007, Doosan Infracore acquired three business divisions (Bobcat, Attachment, and Utility) of Ingersoll Rand US, a small construction equipment.company
2007, Acquired CTI US, a company with source technology for the HCNG engine
2007, Acquired Yantai Machinery Ltd., a Chinese wheel loader company
2008, Acquired Dong Myung Mottrol (currently Doosan Corporation Mottrol,), Korean top hydraulic machineries company
2008, Doosan Infracore acquired ATL (Advanced Technology Lubben), a German warehouse equipment manufacturer
2009, Doosan Acquires Czech Power Generation Equipment Maker Ã…Â koda Power
2012, Acquired Enpure, British water treatment company
Massive M&As actually has resulted in drastic growth of size of the company. Right before active M&A started, in 2000 annual sales were about 4 billion US dollar. Sales have increased up to 6 billion US dollar in 2001, 12 billion US dollar in 2005, and 21.4 billion US dollar in 2009 with acquiring small and big competent companies. In other words, by successfully managing M&A the size of the company became 5 times bigger than before. As a result, Doosan Heavy Industries and Construction is the first ranking company in global desalination market, and Doosan Infracore is the 7th ranked company in global construction materials market.
HRM in M&A: from pre-acquisition to integration phase
Doosan group’s growth initiatives ‘2G strategy’, meaning ‘Growth of People and Growth of Business’, represents Doosan’s emphasis on importance of human resources. Not surprisingly, HRM issues were in the center of consideration when it comes to international M&A strategy.
During pre-acquisition planning phase, Doosan recruited and scouted competent employees to locate them in a specialized team only for M&A. Doosan created Corporate Financing Project (CFP) team which works on major M&A transactions. CFP team is known to consist of only 10 to 20 experienced specialists from foreign consulting companies and accounting companies (Federation of Korean Industries & Sung-Kyun-Kwan University Business Research Institute, 2010).. The team employees make company list for M&A based on information from investment banks, consulting companies and their personal network. The list includes not only financial condition, business structure, and future potential but also national / organizational cultures, human resources assessment of targeted company. CFP team anticipates how they will co-operate with targeted company, if they acquire, dealing with cultural differences and retaining competent human resources. Effective strategy and know-how accumulating in the company, currently Doosan recruits employees for CFP team inside Doosan group as well. By recruiting right people for M&A strategy, Doosan could be prepared for any international M&A based on thorough analysis about acquired company’s culture and human resources.
After acquisition, Doosan has focused on chemical human resources combination during integration phase. It was possible because of strong belief of leadership. Young-Man Park, chairman of Doosan Group said if people do not integrate, different cultures can never integrate. As a result of continuous and massive M&A, 70% of whole employees of Doosan are composed of those from acquired companies (Park, 2009). Doosan has managed human resources focusing on employee’s ability and competence regardless of where they are from, and it is one of their strategy to eliminate us vs. them mentality among employees from different cultures and companies. In the same line, specialists from outside are welcomed to Doosan if they have high competence and potential.
Mitsui Babcock is a good example to show how managing human resources after M&A is important to lead success or failure. Babcock was acquired by Doosan after 10 years poor performance of M&A between Japanese Mitsui and British Babcock. Right after acquiring Babcock, the first thing Doosan did was inviting executives of Babcock to Korea and holding a strategic meeting to share future strategic plans and improve communication together. For Babcock’s side, being invited to the country of acquiring company itself was hot issue, because unnder management of Mitsui for 10 years, they were never invited to Japan or Mitsui company. Doosan’s objective was not to repeat the mistake of Mitsui. Different from Mitsui’s HR practices which assign only Japanese to core critical manager positions, Doosan assigned local British employees to major executive positions. Iain Miller who was CFO of Babcock at that time got promoted to CEO of the company, and about 4,000 employees of Babcock remained with none of them being layoff. While keeping local employees remaining or promoted, Doosan had changed seniority compensation system fixed by Mitsui into performance-related payment system in order to boost competition. Consequently, performance explained result. When Mitsui managed Babcock, contract performance dropped from 433 million pound sterling in 2004 to 345 million pound sterling in 2006. Contrastively, after acquired by Doosan, contract performance pointed 771 million pound sterling, increased more than 2 times compared to the previous year.
During integration phase, Doosan initiated a HRM system to retain core human resources who possess the potential for technical development or managerial know-how. While not forcing Korean or Doosan’s corporate culture, they respect acquired company’s own culture, and purse management run by local executives as much as possible. By doing so, Doosan has kept quality human resource pool both in their own company and acquired company so that maximize mutual synergy effect. For example, when they acquired UK Babcock which had around 5,800 employees, only 5 employees were sent from Doosan to Babcock. It was for respecting acquired company’s culture so that integrate two different companies without repulsion that might be caused by top down way of cultural integration. There is another example. In 2007 at the last stage of M&A deal between Doosan Infrocore and Ingersoll Rand, one of executives of Ingersoll Rand asked Young-Man Park “How is the brand going to be?” Park answered “Why do we change it? We pay lots of money for your great brand value. Destiny of brand should be decided by our customers.”
Case Study 2: Air France-KLM Alliance
Air France and KLM were French and Dutch airline companies respectively before forming alliance, Air France-KLM group, in 2004. The group serves 230 destinations in 113 countries with 586 aircrafts. With Roissy – Charles de Gaulle and Amsterdam – Schiphol Airports as centers, these destinations and aircrafts are controlled and balanced. The total revenues of Air France-KLM in 2011 are 24.36 billion Euros. With 102,000 employees, the company served 75.8 million passengers last year (Air France-KLM, 2012). Each company working respectively based in their own country, Air France-KLM as one organization run three main businesses: passenger business, cargo, and engineering & maintenance. With successful international alliance, each company has remained its individual identity alive by using their own brand name and tangible assets.
Merger and acquisition is an attractive strategy for the companies who aim for survival or growth of the group. However, until today M&A between airline companies from different nationality has been avoided for several reasons. Since air transport industry is categorized as a national basic industry government has limited possessing foreign airline, and it has deterred international merger and acquisition in the industry. Breaking this widespread concern, in 2004 Air France and KLM, national airlines of France and Netherlands, formed strategic alliance to make the biggest revenues creating airline company in the world. Before the alliance, KLM had poor financial portfolio due to the failure of merger with Italian airline company Alitalia, which made specialists expected that KLM failed again in alliance with Air France. However, since both airlines serve lots of different destinations with only 36 common destinations, they were attracted to this deal. Air France took the ‘combination’ approach rather than taking over KLM. They created a new integrated group Air France-KLM, keeping two companies serving with independent style rather than putting them into sub group under one unity. Air France-KLM owns 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 is owned by KLM foundations and the Dutch State, 36.3 % and 14.7 % respectively (Air France-KLM, 2012). Air France-KLM established Strategic Management Committee (SMC) to monitor a new group. SMC consists of 4 French executives and 4 Dutch executives, and holds regular strategic meeting in Paris and Amsterdam every 15 days.
Challenges and Overcome
Since Air France and KLM have different national cultures, conflicts and problems related to cultural difference has occurred after the deal. There are 3 main characteristics of cultural differences between Air France and KLM: staff, skill, and style.
In case of Air France, most of the staffs had recognizable education, which explains that they rarely take detour from academic form in worksite. Also, staffing is mostly concentrated on performance. As structure is strictly organized and control is considered important, the members of the group are professional, systemic with their work, and also have high sense of obligation. To simply describe staffs of KLM, they are reasonable, practical, and direct. They seek the most efficient way for solving problem even if it goes against with structure or rule. They change their way of working according to the style of the problems, not limited to certain academic form. It is more concentrated on developing employee’s skill rather than controlling.
Secondly, one of the competitive advantages of Air France is accuracy of working. As it has been state-owned company for a long time, still workers take administrative approach. The category of reports are subdivided specifically, deliberation and execution of budget require high accuracy. Many procedures of work is systemized, which each of them have officers in charge. Even if the amount is small, for example, to reimburse certain amount of money, it has to be accurate and go through about 3 or 4 people. It is considered trustful, but sometimes people complain about its complexity. While Air France is control oriented, KLM’s dominant managing skill is empowerment. Management manual, rules and regulation are only stated when they are needed. Lots of rights and duties are empowered to staff, and decision making process is fast based on experience. The empowerment which was used as a main skill to motivate staffs to work has been creating conflicts after merger because of its difference from control oriented skill.
Lastly, style of the organization is hard to define only with few characteristics. It is made with structure, staff, and skills of the organization. Air France’s style is focused on manager, putting emphasis on teamwork and process. Intimacy between workers is also high. KLM also emphasizes teamwork, but to the exclusion of private workloads.
Besides these basic cultural differences, Dutch government feared that Air France took most profitable airways of KLM and the company in the end. Moreover, anxiety among employees was another concern to solve. By successfully organizing HRM against these distinct differences, in 2001 after 7 years of the alliance Air France-KLM was ranked as 1st in revenues in airline industry. Yoon (2009) pointed out three main HRM practices they adopted for integration.
For understanding each other’s culture, Air France-KLM have held several training programs. They include intercultural training program for 2 days with 70 employees, Short Term Exchange Program (STEP) in which employees from two companies solve short-term missions with mixed group, and Long term Exchange Program which allows managers to experience and understand the other’s culture under long term mission (Yoon, 2009). Moreover, English courses are provided for all staffs from both firms to make sure language would not deter fluent communication.
Deal with fear of KLM
To address the fear of KLM being taken over, Air France tried to convince them by emphasizing mutual respect, and by relocation. Also, the contract stated that two companies keep distinct entities and operation systems in several parts (Janik, 2003). On top of that, social agreement which promises to retain main business activities within new group was agreed to prevent taking one’s own line mainly.
Restructure, reorganize, and re-skill employees
Even though Air France promised no redundancy in KLM, Air France-KLM group has tried to prevent employees from feeling safe and negligent of developing themselves. By re-educating the employees new system and operation, they could boost employees self-development..
As international M&A is becoming a popular method for successful business, profound understanding of various issues is required. These issues include understanding cultural difference and bridging the gap between. We grouped M&A procedure into 3 steps: pre-acquisition phase, integration phase, and assimilation phase and shown that all phases involve people.
For pre-acquisiton phase, a firm should assess people in acquired company for putting the right man in the right place according to its new strategy. Plus, a due diligence team for integration process has to be prepared before actual M&A occurs. After, in integration phase, which is the core part of the M&A, deep consideration is required for a considerable area. Embracing several issues, two main roles should be discussed which are communication styles from different cultures and staffing. For communication style, both parties must be open-minded and try to avoid secrecy as much as possible by establishing clear communicating way. About staffing, we discussed qualifications of competent manager for international M&A group, useful methods for keeping employees, and motivating acquired employees to work as capably as possible. Finally, in assimilation phase, successful final settlement of international M&A is anticipated only provided with proper HRM’s plan. Company should never lower its guard for final phase. Just because they went through former two phases thoroughly, they have not always constructive results. New faculties who are experienced with professional knowledge about the field, but not with new culture and system should be provided with the proper training system and orientation. In this way, they will be able to focus completely on the work, not disturbed by minor external factors.
Only if all these reminders are properly executed, international M&A will be successfully done. As we can see, international M&A requires lots of works for soothing problems related to connecting not only two companies, but also two different cultures. However, since the result of careful international M&A brings a brilliant success, these all steps and efforts deserve consideration.
Recommendations for Doosan
Doosan has shown dynamic growth led by successful HRM in both national and international M&A for last decade. It was considerate decision not to undertake radical cultural integration actions. Without laying-off employees of acquired company, keeping local executives take core positions was also clever to prevent anxiety and collision of cultural differences. What Doosan Group need for complete cultural integration with acquired companies is consolidating changes during assimilation phase. Here are some specific recommendations for Doosan:
1. Train employees from acquired company to reinforce shared values and practices. While respecting national and corporate culture of acquired company is great to prevent conflicts which could possibly arise, it may not completely eliminate us vs. them mentality in the long run. If acquired company stick to their own practices and is not familiar with Doosan’s culture, they might not feel belonging in Doosan and feel separated from the holding company.
2. Use the qualified executive from acquired company who has fit in Doosan’s values and philosophy. Well qualified local executive who not only has competence but also shares corporate values and deeply understand Doosan’s philosophy will be helpful to integrate cultures, acting as a bridge between two companies. Of course, selecting process should be based on systemized human resource management practices, not on intuition or preference of leadership.
3. Diversify Corporate Financing Project (CFP) team work. CFP team mostly engages in pre-acquisition process to assess financial and cultural fit of acquired company. For integration objectives, CFP team or another team, if needed, should manage integration and consolidation process after acquisition. A specialized project team for integrating stage will be helpful to accomplish complete integration of two companies.
Recommendations for Air France-KLM
Not all International M&A, alliance, or Joint Venture mingle every difference and make newly mixed solution. In some cases, companies combine only a few needed parts from each organization. Air France-KLM took salad bowl approach which respects mutual differences, and keeps their own national and corporate identity, and it was effective. However, even if Air France-KLM group seems to try to make their alliance at least look like “combination” with friendship, their corporate cultures are not fairly learned. Here are some recommendations for Air France-KLM:
1. Make Air France employees more actively engaged in learning KLM culture. Air France-KLM have intercultural training program for employees. However, retraining and re-skilling programs are more targeted for KLM’s employees to learn French or Air France style practices. Mutual learning is more likely integrate cultures with less resistance from employees.
2. Utilize employee feedback. Air France-KLM has done quite good job for training employees after alliance. They could use feedback on training or integration process from employees and build strategy for next steps for more advanced integration.