12 Aug 2009Working Paper Summaries

Culture Clash: The Costs and Benefits of Homogeneity

by Eric J. Van den Steen

Culture clash is often considered a major cause for the failing of mergers and acquisitions, and for this reason it is an important consideration for corporate strategy. Although less publicized, culture clash has also plagued alliances and long-term market relationships. It provides a unique lens on the performance effects of corporate culture itself, and thus culture's potential to generate a competitive advantage. This paper develops an economic theory of the costs and benefits of corporate culture—in the sense of shared beliefs and values—in order to study the effects of culture clash in mergers and acquisitions. Key concepts include:

Culture is the degree to which members have similar beliefs about the best way of doing things.
In mergers and acquisitions, the costs of culture clash will typically show up immediately and affect mainly the operational efficiency of the merged firms.
The benefits of culture clash will take more time to emerge and will affect more the fit with the environment.

Author Abstract

This paper develops an economic theory of the costs and benefits of corporate culture—in the sense of shared beliefs and values—in order to study the effects of 'culture clash' in mergers and acquisitions. I first use a simple analytical framework to show that shared beliefs lead to more delegation, less monitoring, higher utility (or satisfaction), higher execution effort (or motivation), faster coordination, less influence activities, and more communication, but also to less experimentation and less information collection. When two firms that are each internally homogenous but different from each other, merge, the above results translate to specific predictions how the change in homogeneity will affect firm behavior. The paper's predictions can also serve more in general as a test for the theory of culture as homogeneity of beliefs. 38 pages.