Cultural Due Diligence in Mergers and Acquisitions Essay Example

the national cultural distance that used to understand how shared norms and values in one country differ from other (Shenkar, 2001; Hofstede, 2001). In his pioneering work Hofstede (1980) recommended statistically independent attributes of national culture (taking nation as a proxy for culture). They are  power distance

Individualism, masculinity  uncertainty avoidance and long-term orientation. Each of these elements represents one unique dimension of the national culture (Drogendijk, Slangen, 2006). In present cross-cultural business research Hofstede's concept of national cultural distance is widely used, however Schwartz (1994) raised some concerns. The main criticisms were directed to its non-exhaustive nature as well as its coverage in terms of the spectrum of national culture and the sampling nature of Hofstede's survey (Drogendijk, Slangen, 2006).

Apart from Hofstede and Schwartz, various other models also exist that cover some de native attributes of national culture. Some good examples include Ron and Shenkar (1985) and Dow and Karunaratna (2006). There is also growing number of studies that increasing focusing on the individual level perceptual measures of the managers (Zhao, Luo, & Suh, 2004). As manager's perception strongly in uences the strategic decision and behavior, it is now empirically established that choice of international operation sometimes signi antly different than the similar national culture (Evans and Mavondo, 2002). A high rate of failure in this combination process suggests in uential role of national culture (Cartwright & Price, 2003; Hofstede, 1980). Cartwright & Price, (2003) argue that the national cultural differences, measured as cultural distance (CD - a simplistic composite cultural measurer of differences e. g. Hofstede's Index) increases the organizational challenges and act as the main source of uncertainty that eventually increase acquisition costs,

reduce the performance, and in majority of cases lead to failure.

On the whole, weighing the processes across these two cultures can be illustrated in a pyramid, as going from a generic, across the board spectrum, down to the tip of the pyramid analyzing one specific company and its cultural parameters. For the purpose of our study, we analyzed these cultural extremities from the middle ground. Generically speaking, cultural differences between Germany and Brazil are vast; however, for the purposes of our research, we analyzed the cultural differences, less speci to one company, in hopes of setting up a process of CDD to help the joint venture between Germany and Brazil breach the gap of cultural differences.

We analyze these two countries partnerships as a joint venture in doing business within the automobile industry. Because of the significant German investment in Brazil, 17% of the total FDI in 2005, the future prospects of manufacturing automobile parts are of interest to both the German and Brazilian economies. With the change in current economic climate in Europe that produced a significant fiscal defiit, there is an inevitable need for European Automobile manufacturing to seek outside markets to keep growth and profit maximization high. As a result of the increase in competition for market, soaring labor costs, and decrease in demand-most of the automobile manufacturers prefer to enter in emerging markets where demand is high and the cost of production is low. Considering the benefits, most of German manufacturing of automobile and auto-part makers have some kind of business presence in Brazil. With that being said, however, there are certain limitations that occur with in the joint venture of Brazil

and Germany.

For simplicity, we have outlined a few of the overriding cultural differences between the two countries that inevitably formed challenges within the business environment. Our Assumptions In our research, there are many theories and methods associated with analyzing cultural barriers with Germany and Brazil. The theoretical background mentioned above are different tools used to recognize these barriers and serve as outlining guides to help assess cultural differences. There are many different theories and methods that can be debated and analyzed; there is no single approach to the process.

We picked nine attributes and made assumptions, stemming from our research, as to the prospects of a country such as Germany, entertaining the joint venture within the the automobile industry into Brazil. The primary research we gathered by interviewing certain leading Automobile managers help validate our assumptions. From our primary research we can then understand the success factors associated with such a joint venture. From these success factors we are then able to make certain recommendations for managers to better assess CDD to lead their companies to prosperity and future growth in production and profits. Considering the theoretical structure of each attribute, we have drawn assumptions that are connected to the different levels: National level: Assumption 1: Cultural Distance The larger the national cultural differences between two countries, the lower the probability of a success of any international business operation. Therefore it is more important it is to do an appropriate cultural due diligence to set up the boundaries of cultural, financial, and structural due diligence. The assumption is based on various composite measures of cultural difference discussed earlier.

Its intended to capture the various attributes of psychic

stimuli (Dow and Karunaratna, 2006) and other psycho-social factors such as language, religion, family- structure, quality and level of education, industrial development, organizational strength and capabilities, brand value, political and economic systems, legal frame work or any other social parameter e. g. data protection. Assumption 2: High Context vs Low Context Cultures Entering a high context culture from a low context culture and vice versa are both difficult When you enter a high context culture can be diffiult to if you are an outsider (because you don't carry the context information internally, and because you can't instantly create close relationships - Hall, 1976) or from a low context culture. In such case the quality, quantity and direction of communication can be confusing (Hoecklin, 1995). Studies suggests Brazil is a high context culture on contrast to low context nature of Germany. This attribute creates an array of differences in standard business operation. Within a high context culture knowledge is contextual and relational, as opposed to explicit, public, and accessible in low context culture like Germany.

In Brazil there is a strong boundary that defines who is outsider. That severely hinders the fiow of knowledge between the members of the culture and outsiders. Further Brazilian prefers verbally explicit communication as opposes to written and more formal nature of communication preferred by Germans. As described in Hofstede framework decision and activities often focused around personal central person who has authority. In such high power distance culture employee expect direction from the upper level to execute task. On the other hand, rule oriented German culture prefer task orientated division of labor which often found mis- in the Brazilian context. Assumption

3: Labor relations Understanding the characteristics and differences in labor relation practice in the host country is a must for home country company. What works in one country, doesn t always translate to another country; as a result, labor relations can be effected. In Brazil for example, the notion of “family” and “family oriented” business is essential to the work force. People are hired on a relationship basis in regards to who family, friends, etc are within the industry. German automative fims aim for highest quality, therefore they struggle profusely with any lack of efficiency. If a worker is not skilled or properly trained, it is his merit that is judged and eventually eliminated, regardless of relational standing within the company. This quick notion of “disposal” can be seen as a decrease in moral attitudes in Brazilian work environments and can quickly put off a employee within the company. Organizational level: Assumption 1: Alignment of Objectives The success/performance of combined business process depends on the integration process and the adopted control systems.

Companies (home country as well as host) realize the cultural cost associate with integration and sharing the knowledge which can sometimes effect the performance of management to operate as transparent as possible. This assumption addresses the field of decision and control which drives companies to focus on the realization and alignment of common company objectives. Various studies suggest that unless any business operation is motivated mainly by financial benefits or to lower the cost of capital, post-acquisition integration plays an important role in determining the success of the operation (Haspeslagh and Jemison, 1991).

The acculturation theory (Berry, 1980) that describes the negative post acquisition behavior

and experience (acculturative stress), suggests various reasons of post-acquisition conflict. Study suggests both national cultural difference and organizational cultural difference increases the post-acquisition conflicts. They are organizational cultural differences (production, R&D, Values, Management and control, Sales and marketing) that must be understood and aligned in order to ensure maximum success. The understanding of values and expectation reduces the uncertainties. Assumption 2: Experience

In other words, countries such as Germany who have significant experience in the automobile industry can transition into Brazil much easier than if they were starting a venture independent of any pre-existing production operations in their home country. The fact that Germany has established itself as a world manufacturer within the auto mobile industry has leveraged its position to enter an emerging market such as Brazil; the prospects of success are greater given the experienced modis of operandi already established within the given sector.

Assumption 3: Internal Framework Company should interact both inward as well as outward to successfully integrate the foreign entities. Self-assessment is necessary to understand the corporate structure and proactive in flow of knowledge with in the home country in order to survive within the host country. In other words, Germany will never be successful moving into another country with out a proper structure within the pre-existing business. Internal Framework and set up is essential to global integration and corporate culture.

The “skeleton” of a company depends on the organization itself, embracing certain inevitable cultural establishments that have allowed it to be successful in the past, while also keeping enough room for flexible integration into the emerging host country to allow for prospective growth into that market. Brazil is more than equipped to

adapt the business framework brought in from Germany; 6. Results of the interview – identified success factors The interviewed experts reinforced that the joint venture is a relevant entry mode to Brazil.