“KNOWLEDGE IS POWER”

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“KNOWLEDGE IS POWER”

The Impact of Power and Control after International Mergers and Acquisitions

on the Efficiency and Effectiveness of the Knowledge Transfer Process between

Employees.

Karin van Diest

S1531077

July, 2009

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“Nam et ipsa scientia potestas est.

(In and of itself, knowledge is power)”

Francis Bacon, 15971

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ABSTRACT

International mergers and acquisitions are nowadays common practice. To gain and retain competitive advantage, effective and efficient knowledge transfer between employees is utmost necessary. Since differences in the power inequality among the parties involved are evident between mergers and acquisitions, the effects of these differences are important to investigate. Therefore, this research has investigated how the amount of power or control the acquirer has over the acquired, in an international acquisition or an international merger, impacts the efficiency and effectiveness of the knowledge transfer process between employees. Since no theory was available on this subject matter, this research has investigated this problem by first developing propositions through a theory building phase, continued by testing these propositions through an initial theory testing phase with case studies. The literature review and theory building phase suggested a clear-cut negative effect of power inequality on the effectiveness and efficiency of the knowledge transfer process. The theory testing phase, thereafter, has further developed this theory by adding some variables that influence this relationship and suggesting a probabilistic relation instead of a deterministic one. These findings are an addition to the knowledge management field and particularly the knowledge transfer field of research, a basis for future research on this subject and important for managers and consultants having to make decisions concerning mergers and acquisitions.

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Key words: Knowledge Transfer Process, Mergers, Acquisitions, Power, Control, Efficiency, Effectiveness & International M&A

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LIST OF FIGURES

Figure Title Page

Figure 1 Conceptual Model 16

Figure 2 Framework of Organizational Competencies 20

Figure 3 Dimensions of Effectiveness 24

Figure 4 Dimensions of Efficiency 25

Figure 5 Power-in-Communication Model 27

Figure 6 Theoretical Framework for Characterizing this Research in the Knowledge Management Literature

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Figure 7 Expected Deterministic Relation Between Concepts 43

Figure 8 Merger of Equals – Acquisitions – Hostile Takeovers 67

Figure 9 Conceptual Model Revised 78

Figure 10 Sender-Receiver Model Appendix A/91

Figure 11 Gerbner’s Model Appendix A/91

Figure 12 Lasswell’s Model Appendix A/92

Figure 13 Jakobson’s Model Appendix A/92

Figure 14 Single-Loop Learning Appendix C/96

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LIST OF TABLES

Table Title Page

Table 1 Differences Between Explicit and Tacit Knowledge 33

Table 2 Case Participants 50-51

Table 3 Questions on the Type of International Merger or Acquisition

Appendix B/93

Table 4 Questions on the Power Distribution Appendix B/93-94

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1. INTRODUCTION

Looking at the business pages of newspapers, one can daily read stories about mergers and acquisitions which are undertaken to make the businesses involved more effective and profitable (Robbins & Barnwell, 2002). Mergers and acquisitions are thereby often presented as a tool for a firm to gain access to new sources of knowledge (Empson, 2001). Managers have several reasons to enter into a merger or an acquisition. Walter and Barney (1990: 81) mention several managerial goals for mergers and acquisitions. Examples such as; to “utilize the acquiring company’s expertise in marketing, production, or other areas within the acquired company”, to “penetrate new markets by utilizing the acquired company’s marketing capacities”, to “utilize interlocking and mutually stimulating (synergistic) qualities of the acquired company vis-á-vis the acquiring company”, to “utilize the acquired company’s personnel, skills, or technology in other operations of the acquiring company” and to “accelerate growth or reduce risks and costs in a particular industry in which the acquiring company has a strength such as executive wisdom”, are used for both mergers and acquisitions. They clearly show the importance of efficient and effective knowledge transfer between the previously separate firms after a merger or an acquisition.

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knowledge after a merger or an acquisition and the above mentioned barriers may constrain this process.

Pérez-Nordtvedt et al. (2008: 737-738) state that they believe that “exploring how governance relationships impact the efficiency and effectiveness of the knowledge transfer process is important”. According to Daft (2004: 601) the efficiency is “the amount of resources used to produce a unit of output” and the effectiveness “the degree to which goals are attained”.

1.1 Problem Statement

The previous section has shown that a large motivation for managers to enter into a merger or an acquisition is to combine the resources and knowledge bases of two companies in such a way that the combined resources and knowledge base has a larger effect than the effects of the two previous companies together. However, in order to make use of the knowledge bases of the two previous separate companies in the most advantageous and synergistic way, effective and efficient knowledge transfer between the employees is necessary. The systems approach towards effectiveness explains the importance of analyzing the effects of the power distribution after a merger or acquisition on the efficiency and effectiveness of the knowledge transfer process. It states that, through the interrelatedness of the two previously separate entities after a merger or an acquisition, inefficient and ineffective knowledge transfer will negatively affect the performance of the whole company (Robbins & Barnwell, 2002)

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knowledge transfer process for their decision making on whether to govern the relation with another company as a merger or an acquisition.

Knowledge transfer is a very broad concept that is often studied upon. This research will focus on the knowledge transfer process through personal interaction between employees and electronic documents. Prior research has often focused only on either the transfer process of tacit knowledge through personal interaction (e.g., Inkpen and Tsang, 2005) or the transfer process of explicit knowledge through electronic documents (e.g., Hansen and Haas, 2001) (Haas and Hansen, 2007). This research will investigate the impact of international mergers and acquisitions on the efficiency and effectiveness of both the transfer of tacit and explicit knowledge through personal interaction and electronic documents. Although written documents can be on paper or in digital format, this research will, in accordance with the research of Haas and Hansen (2007), only focus on the electronic documents since ‘electronic knowledge management systems’ are nowadays prevalent in many companies.

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whether the degree of control of one party over the other has indeed an influence on the transfer of knowledge between the parties.

1.2 Literature Gap

Due to the increasing competition among multinational companies, the effective and efficient transfer of knowledge internationally within a company will be necessary to gain and retain competitive advantage (Bhagat, Kedia, Harveston & Triandis, 2002). Through the transfer of knowledge within a company, a company is able to use the knowledge acquired in one country in other countries as well. It would be a waste of both time and resources to invent something in one part of the company that is already known in another (Bresman, Birkinshaw & Nobel, 1999).

There has been a lot of research done and academic literature about international mergers & acquisitions and knowledge transfer processes. However, there is no existent theory about the effects of the degree of power or control that the acquirer has over the acquired after international mergers and acquisitions on the effectiveness and efficiency of the knowledge transfer process. As stated above, several researchers have suggested that further research is needed in this area. As stated by Bresman, Birkinshaw and Nobel (1999), mergers and acquisitions cannot be compared to other governance modes since the two previously independent organizations are not immediately and to their full extent integrated into a multinational corporation, but they are also not totally independent. Therefore, research on knowledge transfer in other governance modes is not likely to be applicable to mergers and acquisitions. This research will therefore contribute to the existing academic literature by investigating the different effects of mergers and acquisitions on the efficiency and effectiveness of the knowledge transfer process.

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constructs into logical propositions on how the governance relationship impacts the efficiency and effectiveness of the knowledge transfer process between employees.

Through the information gathered in the theory testing case studies, these propositions will be further strengthened or reformulated. These reformulated or strengthened propositions will in turn give an answer to the research question and the information gathered during the research will enable me to explain precisely how my study will contribute to the decision-making process of managers dealing with mergers and acquisitions and to the theory on knowledge transfer.

1.3 Significance of the Study

As stated by Robbins and Barnwell (2002), informed managers will have a competitive advantage over less informed competitors. Knowing how the amount of power or control of the acquirer on the acquired party after an international merger or acquisition impacts the efficiency and effectiveness of the knowledge transfer process between the employees will help managers to decide under which conditions the specific structural options are preferred. The practical significance of this study can therefore be seen in its value for managers and consultants who are involved in the decision-making for a international merger or an international acquisition.

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1.4 Goal

The goal of this research is to develop theory on the impact of the amount of power or control an acquirer has over the acquired, after an international merger or acquisition on the efficiency and effectiveness of the knowledge transfer process between employees. Furthermore, this research has the goal to test the developed theory by an initial theory testing case study. The end result will then be propositions that are reformulated or strengthened by the outcomes of the initial theory testing case study. These can be used by managers in their decision making and by other researchers to conduct extra theory testing to test the robustness and generalizability of the propositions.

1.5 Main Research Question

Based on the above logic, the main research question for this research will be:

1.6 Sub Questions

As will be explained in the literature review and methodology chapter, this research will contain of a theory building and a theory testing phase. In the theory building phase and the literature review chapter as a whole, the existing literature on the different concepts

How does the amount of power or control the acquirer has over the acquired, after an international acquisition or an international merger, impact the efficiency and effectiveness of the knowledge transfer process between the

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used in this research will be analyzed to construct propositions that will help answering the research question mentioned in the previous section of this research paper.

In the literature review chapter, the following sub-questions will be used:

- What is known in the literature about knowledge transfer processes and knowledge transfer through personal interaction and electronic documents?

- What is known in the literature about the measurement factors ‘efficiency’ and ‘effectiveness’?

- What is known in the literature about international knowledge transfer between employees?

- What is known in the literature about the effects of power and control on knowledge transfer?

- What is known in the literature about knowledge transfer processes in relation to acquisitions and mergers?

These sub-questions will be used because they cover all the concepts of the research. They will be used to ensure that all the knowledge and facts from the existing literature on the different concepts in the research are known. According to Dul and Hak (2008: 48) a literature review “will describe what is considered to be “known” about the object of study and what is not yet known”. The literature review will enable me to give “a description of the current body of knowledge” and helps me in “reasoning about what needs to be done next” (Dul & Hak, 2008: 49). These facts and knowledge will be used to construct the propositions that are most likely, based on the literature, to answer the main research question.

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mergers and acquisitions. People that were involved in mergers or acquisitions can be managers and employees of both the acquired and acquiring company or the merging companies and people that are knowledgeable about these governance modes can be consultants or experts in the field of mergers and acquisitions. The further strengthening or (re)formulating of the propositions will further improve my ability to answer to research question in a correct way.

1.7 Conceptual Model

Figure 1 Conceptual Model ?

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As can be seen from this conceptual model (Figure 1), the theoretical idea of the research is to analyze how the amount of control or power the acquirer has over the acquired, after an international merger or acquisition, has an impact on the knowledge transfer process and specifically the effectiveness and efficiency of the knowledge transfer process. The unit of analysis is the employees, since knowledge can only be transferred and implemented through the individuals within an organization. Taken the conceptual model and the definition of the unit of analysis together, brings us again to the main research question of this research. Namely: ‘How does the amount of power or control the acquirer has over the acquired, after an international acquisition or an international merger, impact the efficiency and effectiveness of the knowledge transfer process between the employees?

Amount of Power or Control of the Acquirer on the Acquired

Effectiveness

Knowledge Transfer Process

Efficiency

Merger Acquisition

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1.8 Overview of the Paper (Structure)

After this chapter has laid out the theoretical basis of the research, the remainder of this research paper has been organized in the following way:

Chapter 2 contains the literature review. Part of this literature review is the theory developing phase, where propositions will be developed to answer the main research question.

Chapter 3 starts by explaining the methodology of this study. Thereafter, this chapter elaborates on the case studies that will be used in this study by discussing the reasoning behind the case study method and the features of the interviews. Finally, this chapter gives an overview on how the data will be collected, the data sources and the way the data will be analyzed.

In chapter 4, questions are developed that will be used in this research and can be used in replication studies. Hereafter, chapter 5 contains the analyses the data with a theory testing phase. Chapter 6 will elaborate upon the results of this analysis.

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2. LITERATURE REVIEW

The following literature review contains a theory building phase. The results of this phase will be translated into propositions which can be tested. Based on the literature review, questions will be developed in chapter 4 that can be used for the semi-structured interviews and by future research. In the analysis, these propositions will be tested and further developed through an initial theory testing phase. In this section the propositions developed in the theory building phase will be tested through case studies and expert interviews with the guidance of the questions and propositions developed beforehand.

The literature review is developed by first reviewing in the literature what is known about the knowledge transfer processes, the measurement factors efficiency and effectiveness and the concepts power and control. Hereafter, in the theory building phase, propositions are developed by discussing international knowledge transfer between employees, the effects of power and control on knowledge transfer and the knowledge transfer processes in relation to mergers and acquisitions. The sub questions that will be analyzed during the literature review were mentioned in the introduction.

In the theory building phase, propositions are developed on how the amount of power or control the acquirer has over the acquired, after an international acquisition or an international merger, impacts the efficiency and effectiveness of the knowledge transfer process between the employees.

2.1 Data Sources Literature Review

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using the reference lists of previous articles, until the reference lists did not show any supplementary references that could be of interest for my literature review. Furthermore, I have looked for books in the university libraries on the different subjects.

2.2 Concepts in the Literature

To get a better insight in the subject of this research, this section contains a literature review on the concepts that are important for this research. The concepts knowledge and knowledge transfer will firstly be discussed, where after the measurement factors efficiency and effectiveness will be discussed. Finally, this section of the literature review will discuss the concepts power and control.

2.2.1 Knowledge & Knowledge Transfer

As elaborated upon in the problem statement section of this research paper, this research will investigate the impact of the amount of power or control the acquirer has over the acquired, after international mergers and acquisitions, on the efficiency and effectiveness of both the transfer of tacit and explicit knowledge through personal interaction and electronic documents. This subsection will investigate what the concepts ‘knowledge’ and ‘knowledge transfer’ actually entail. In the theory building phase, this subject will be further analyzed with the use of the theoretical framework of Argote, McEvily and Reagans (2003).

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and expert insights that provides a framework for evaluating and incorporating new experiences and information”; whereas Hedlund and Nonaka (1993: 117) defined it as “cognitive perceptions as well as skills and expertise embodied in products or services”.

Organizational knowledge is the term that can be used for the competencies, routines and innovations that are present within a company, which influence the performance of the company (Argote & Ingram, 2000). There are three sets of competencies which are the core of an organization, namely, culture, capabilities and connections. These competencies are mutually reinforcing and interdependent on each other (DeFillippi, Arthur & Lindsay, 2006). The organizational competencies and their relations to each other are shown in Figure 2. As explained above, organizational knowledge is very important for a company to gain competitive advantage.

Figure 2

Framework of Organizational Competencies

Source: (DeFillippi, Arthur & Lindsay, 2006: 80) Culture

The organization’s sense of purpose, mission and core

values.

Capabilities Knowledge and skills embodied in organizational

activities. Connections

Supplier, customer and alliance partners and other

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The terms knowledge and information are often used interchangeably and although these concepts do have similarities, knowledge can be clearly distinguished from information (Schulz, 2003). Bolisani and Scarso (1999) use a cognitive perspective to explain this difference. Under this perspective, information can be seen as the basis for knowledge. Whereas information is the objective facts or details about an event or subject, knowledge includes the interpretations of these facts and details. Knowledge is therefore the capability of humans to understand what information means.

Gupta and Govindarajan (1991) have researched the knowledge flows within multinational corporations and from their research, a definition of knowledge transfer can be developed. Based on their research, the definition of knowledge transfer is the transfer of functional knowledge and/or market knowledge between units in a company. Examples of functional knowledge are financial and technical expertise, whereas examples of market knowledge are knowledge about customers, suppliers and products. Through the transfer of knowledge within a company from one unit to another, the units will be affected by the experience of the other unit (Argote & Ingram, 2000). This research investigates all the knowledge transfer flows between the two previously independent companies and within the newly established company as a whole. Both knowledge inflows and outflows from the acquired and acquiring company and both merged companies after the acquisition or merger are incorporated into this research.

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these models and the sender-receiver model) (Fiske, 1990). However, the basic elements of the sender-receiver model can very well be used to summarize the elements of the knowledge transfer processes that are the focus of this research. According to this model, the basic elements of knowledge transfer are the source of the knowledge, the knowledge transfer channel, the message itself, the recipient of the knowledge and the context in which the knowledge is transferred (Szulanski, 2000).

For this research, the employees within the acquiring and acquired companies or the merged companies can both be the sender and the receiver of knowledge. This research is therefore not focusing on one-way knowledge transfer, but on the mutual transfer of knowledge between two units. The knowledge transfer channels on which this research is focusing on are the transfer through personal interaction and electronic documents. The kind of knowledge that is the focus of this research is further elaborated upon in the ‘properties of knowledge’ section in the theory developing phase below. Finally, the context of the knowledge transfer of this research is the newly established organization after a merger or an acquisition between two previously independent companies. The sender-receiver model therefore clearly shows the scope and features of this research.

Schulz (2003) explains that there are many ways to transfer knowledge between subunits within a company, namely via telephone, e-mail, regular mail, policy revision training, meetings, job rotation, shared technologies, and reviews of prototypes. This research will focus its attention during the theory testing phase on personal interaction (e.g., training, meetings, job rotation etc.) and electronic documents (e.g., e-mail) to ensure the inclusion of both the knowledge transfer of tacit and explicit knowledge. The choice for electronic documents instead of, for instance, regular mail, was made due to the international dimension of the mergers and acquisitions and the growing importance of knowledge transfer through electronic documents in international settings. However, when other modes of knowledge transfer are discussed during the interviews, these will be taken into account for the analysis as well.

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large differences in the effectiveness and efficiency of knowledge transfer in companies (Szulanski, 1996; Argote & Ingram, 2000).

2.2.2 Efficiency & Effectiveness

“Firms are efficient means by which knowledge is created and transferred. Through repeated interactions, individuals and groups

in a firm develop a common understanding by which to transfer knowledge from ideas into production and markets. In this very critical sense, what determines what a firm does is not the failure of a market, but the firm’s efficiency in this process of transformation relative to other firms.” (Kogut & Zander, 1993: 631)

The above quotation from Kogut and Zander (1993) shows the importance of efficient knowledge transfer for companies to gain competitive advantage. When a company knows more than its competitors and customers and knows how to transfer this knowledge throughout the company efficiently and effectively, these capabilities can significantly improve the quality and success of the whole company.

Pérez-Nordtvedt et al. (2008) have reviewed what kind of dimensions of knowledge transfer have been discussed in the literature. In this review, they discovered four dimensions of knowledge transfer: comprehension, usefulness, speed and economy. Since these dimensions are based on a large amount of research (e.g., Zahra et al., 2000; Choo, 1998; Kogut, 1995; Szulanski, 1995, 1996; Hansen et al., 2005), they will be used in this research to measure the efficiency and effectiveness of the knowledge transfer process.

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one to whom the knowledge is transferred. When the knowledge is not understood, it cannot be used to gain competitive advantage. Macharzina, Oesterle and Brodel (2001) even state that the context of the knowledge might have to be changed in order to achieve effective knowledge transfer. The transferred knowledge might not be understood correctly when it is transferred in its original ‘as is’ state to another part of the company.

According to Pérez-Nordtvedt et al. (2008), comprehension and usefulness show the effectiveness of the knowledge transfer process (Figure 3). Comprehension can be defined as the “extent to which the new knowledge transferred is fully understood by the recipient” and usefulness as the extent to which the transferred knowledge is relevant to the success of the merger or acquisition and the organizations involved (Pérez-Nordtvedt et al., 2008: 717).

Figure 3 Dimensions of Effectiveness

The knowledge transfer process also needs to be efficient to ensure that the gained capabilities through the merger or acquisition will indeed contribute to the competitive advantage of the company (Figure 4). Efficient knowledge transfer is not often a goal by itself for a company. When knowledge is transferred as efficient as possible without taking into account the effectiveness of the process, chances are that the transferred knowledge is not attributing to its intended purposes (Sudit, 1996). However, efficiency will better enable effective knowledge transfer to achieve competitive advantage for the company. When the

Effectiveness Comprehension

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knowledge is transferred too slowly, there is a high likelihood that competitors have gained the same or similar capabilities in the mean time. The competitive advantage of the capabilities, therefore, declines when the speed of the knowledge transfer process is lower. Furthermore, the costs of the knowledge transfer process should not become too high by using more resources than needed. According to Robbins and Barnwell (2002: 66): “Efficiency is achieved by using resources to their maximum. It is characterized by an absence of slack”. The chance that the benefits of the gained capabilities are lower than the costs of achieving them grows when more resources are used than needed to gain the capabilities. Therefore, the capabilities can only contribute to a competitive advantage when they are gained through speedy and economically knowledge transfer (Inkpen, 2000).

The speed of the knowledge transfer process is how fast the knowledge is transferred to the recipient and the economy of the knowledge transfer process is the costs made and the resources used during the process (Pérez-Nordtvedt et al., 2008: 717).

Figure 4 Dimensions of Efficiency

2.2.3 Power & Control

The question that arises during the literature review of this research is: ‘What do we know about the relationship of power and control issues between senders and receivers of

Efficiency Speed

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knowledge and its impact on the knowledge transfer between them?’. This section will therefore elaborate on what is known in the literature about these issues.

At the National University of Singapore, the professors of the course Business Communication have developed the Power-in-Communication model that shows the importance of power in communication and knowledge transfer (ES2002 Business Communication Website, 2009). According to Dr. T. R. F. Tupas, senior lecturer and division head of Research and Publications and the Centre for English Language Communication at the National University of Singapore, “any communication model that does not take into account the role of power in communication is missing the whole point – and this is especially critical in business communication where people talk to each other to influence each other, […] and where people do not occupy the same/equal positions in the workplace”3.

The Power-in-Communication Model as shown in figure 5, is intended to show that power does not only influence communication but is part of any communication situation. According to Dr. T. R. F. Tupas this is “especially so in the business communication where a variety of dominant/subordinate roles are prevalent”. Furthermore, he states that this model was meant to highlight the role of power in interactions among people.

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Figure 5

Power-in-Communication Model

Power Relations between Participants

Source: (ES2002 Business Communication Website, 2009: Week 2 The Communication Process Slides)

A theory that can be applied to the relationship of power and control issues between the senders and receivers of knowledge is the theory of strategic contingencies (e.g., Hickson, Hinings, Lee, Schneck & Pennings, 1971; Hinings, Hickson, Pennings & Schneck, 1974). This theory is focused on intraorganizational power and companies involved in a merger or acquisition cannot, since they are not immediately and to their full extent integrated, fully be seen as one organization. However, the ideas of the theory of strategic contingencies can be used in this research. The theory explains that organizational units (such as the two previously independent organizations after a merger or an acquisition) that control the most and important resources or have the largest hierarchical authority will have the greatest ‘unit power’. Unit power is defined by Wong, Ho and Lee (2007: 129) as “the influence of a unit on the decisions or actions of another unit”. This theory therefore actually explains that the unit that has and controls the most resources will make the other unit dependent on these resources. This dependency of the other unit will make the unit with the most ‘unit power’ more powerful.

Receiver

Sender

Receiver

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While discussing managerial power, Sudit (1996) gives a definition of power that can also be used, together with the concept of ‘unit power’, to measure the amount of power or control an acquirer has over the acquired. He states that managerial power can be defined and measured by “the quantity of resources, particularly human resources, assigned to managers, and the degree to which they control those resources” (Sudit, 1996: 87). Slightly adapting this definition to the topic of this research, the amount of power or control an acquirer has over the acquired can be defined and measured by the ability of the acquirer to control and influence the acquired and its resources.

In his comparative analysis of complex organizations, Etzioni (1961) has developed a classification of the relationships between units in an organization. This classification is based on how the control is structured within the organization and how power is used to ensure compliance among the employees in the units. According to Etzioni a unit (Unit A) can influence the behavior of another unit (Unit B) in accordance with its intentions by physical, material or symbolic means. These means differentiate the type of power used. Coercive power is used when a unit influences the behavior of another by threatening or using physical punishments (physical means). When unit A has control over material means such as money, services and products, and rewards behavior that is in accordance with its directives with these material means and punishes unintended behavior with refraining unit B from these material means, remunerative power is used. Finally, normative power is used when symbolic means are used to influence the behavior of unit B. With this type of power, one can think of the ability of unit A to reward employees of unit B when they are showing the intended behavior with giving them a higher esteem and more prestige within the company by giving them higher positions, rewards or special attention in ceremonies. When unit A is trying to influence unit B to behave in the way they would like the unit to behave, any of these types of power or a combination of them can be used (Etzioni, 1961). These types of power show that unit A has power over unit B when it has the resources or means to influence the behavior of unit B.

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(Crozier & Friedberg, 1980: 34). When there is more at stake in the relation for unit B, unit A is more able to influence the behavior of unit B and is therefore more powerful.

Reward power, coercive power, legitimate power, referent power and expert power are the often cited five forms of power of French and Raven (1959). The concepts and ideas of these forms of power can be found back in the research of Etzioni (1961) and Crozier and Friedberg (1980). The first two forms of power, reward power and coercive power can be seen back in the findings of Etzioni, when unit A has physical, material, or symbolic means, it can both use them to encourage behavior of unit B that is in line with its intentions (reward power) and discourage unintended behavior (coercive power). Legitimate power is power that is accepted and seen as fair due to the role of the unit. Referent power is existent when unit B wants to be like or be a part of unit A, for example because unit A has a brand name that is highly valued. Finally, expert power is existent when unit A has knowledge or skills that unit B needs. When unit A has more legitimate, referent or expert power, there is more at stake for unit B in the relationship between the two units. There is therefore an unequal distribution of any kind of power between the units when unit A has more physical, material and symbolic means and there is more at stake in the relationship between the units for unit B.

On the impact of the relationship of power and control issues between senders and receivers of knowledge on the knowledge transfer between them, Hong and Snell (2008: 254) found in their research that “differences in distribution and exertion of power among stakeholder groups govern the terms of participation in collective learning practices and the nature of those practices”. Since the power is more unequally distributed after an acquisition than after a merger, as will be elaborated upon in the theory developing phase, this finding suggests that due to the larger power difference of the two parties after an acquisition, the efficiency and effectiveness of the knowledge transfer process will be worse compared with after a merger.

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difference of the two parties after an acquisition, the efficiency and effectiveness of the knowledge transfer process will be worse compared with after a merger.

2.3 Theory Building Phase

In the theory building phase, propositions will be developed through conducting a literature review. First, this research will be placed in a knowledge management literature framework where after the international knowledge transfer between employees will be discussed. Hereafter, the effects of power and control on knowledge transfer and knowledge transfer processes in relation to mergers and acquisitions will be analyzed.

2.3.1 Knowledge Management Literature Framework

Research in the knowledge management field can be found in many different disciplines (e.g., economics, information systems, sociology, strategic management, etc). This has resulted in the fact that there is now a lot of literature in this field which is highly diversified in its nature. Argote, McEvily and Reagans (2003) have developed an integrative theoretical framework which enables us to clearly place this research into the knowledge management field. The scope of this research in the knowledge management field is shown by the diamond-shape in Figure 6.

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as elaborated upon above, when the knowledge and experience of one unit within an organization affects another (Argote, McEvily & Reagans, 2003).

As can be seen from the above explanations of the knowledge management outcomes, these outcomes are connected and related to each other. Before a company is able to retain knowledge, the knowledge first has to be created within the company and through knowledge transfer within a company, new knowledge can be created as well. Therefore, although the focus of this research is on the knowledge transfer process, through this interrelatedness, features of knowledge creation and knowledge retention will also be found in this research.

Figure 6

Theoretical Framework for Characterizing this Research in the Knowledge Management Literature

Properties of Units Properties of The Relationships between Units Properties of Knowledge Creation Retention Transfer

= Characteristics of this research

Source: Argote, McEvily and Reagans, 2003: 573

Argote, McEvily and Reagans (2003) have been able to group the diverse literature on knowledge management in three properties of the context of knowledge management. The emphasis of this research is on the properties of the relationship between units. Since the properties of the units and the knowledge itself are also important in answering the main

K n o w le d g e M a n a g e m e n t O u tc o m e s

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question of this research, the somewhat thinner endings of the diamond shaped figure in Figure 6 show that these contexts are elaborated upon as well.

1.3.1.1 Properties of units and properties of relationships between units.

The units of this research are the previously independent companies that have merged or have experienced an acquisition and the employees that are working for these companies. The properties of these units and the properties of the relationship between these units that are important in this research are highly related.

The properties of the previously independent companies after the merger or acquisition and the employees that are important in this research are the amount of power or control the companies have and the cultural background of the employees. However, the properties of the relationships between the two previously independent companies are the most important for this research.

Argote, McEvily and Reagans (2003) have found that these relationships can vary in different ways. The properties of the relationship that can vary include the “intensity of the connection, communication or contact frequency, and social similarity” (Argote, McEvily & Reagans, 2003: 573). These properties can all have an impact on the knowledge management process.

The differences in the amount of power and control between the two companies and, therefore, the power symmetry or asymmetry in the relationship between these two companies, is a property of the social similarity between the units in this research that is an important factor in finding an answer to the main research question. This property of the relationship between the units plays therefore an important role in this research.

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research, the cultural distance between the units is held constant. Due to this validity consideration, this research focuses on mergers and acquisitions between German and Dutch companies. Finally, an important property of the relationship between the units is the dependent variable of this research; the efficiency and effectiveness of the knowledge transfer process between the employees in the organization.

1.3.1.2 Properties of knowledge

One property of knowledge that is dealt with in this research is the degrees of tacitness and explicitness of knowledge. The differences between explicit and tacit knowledge can be seen in Table 1. Since both the transfer of explicit and tacit knowledge are important to be transferred among different units within a company to gain competitive advantage, both are incorporated into this research.

Table 1

Differences Between Explicit and Tacit Knowledge

Explicit Knowledge Tacit Knowledge

Knowing about (objective knowledge) Knowing how (subjective knowledge) Rationalization of facts & formal models System of ideas, perceptions & experience Easy to codify, transfer & reuse Difficult to transfer

Source: (Bolisani & Scarso, 1999: 211)

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positive influence on the performance of the company (Darr, Argote & Epple, 1995). Since the two previously independent companies are not totally independent or fully integrated after a merger or an acquisition, the question whether the knowledge of one unit is perceived to be internal or external to the company by the other unit is not clear-cut. The power distribution after a merger or acquisition might therefore have an influence on this perception. This leads to the first proposition.

One of the motivations of Argote, McEvily & Reagans to develop this framework was to find literature gaps in the knowledge management field. Based on this gap analysis, they recommend future research on the relationships between two units to investigate the effects of power or conflict on knowledge management outcomes. This research, on the effects of power on the knowledge transfer process is following up on this recommendation.

2.3.2 International Knowledge Transfer Between Employees

Organizations, such as companies, are not able to learn by themselves. Organizational learning is, therefore, the learning of organizations through its members. This can be done by adding new members to the organization or by the learning of the existing members themselves. Simon (1991: 125) even claimed that “all learning takes place inside individual human heads”.

As Friedman (2001: 400) stated: “Organizational learning is accomplished when individuals make their mental models explicit and mutually modify them to create shared organizational mental models”. This definition shows that tacit knowledge is the basis of organizational learning and knowledge creation. The sharing of tacit knowledge is not easy,

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since it is largely developed through the things a person has experienced and is it is therefore not easy to explain the content of this knowledge to others. Employees with different backgrounds, perspectives and motivations, experience different things and things in a different way. The sharing of this tacit knowledge is therefore very important for the knowledge creation and transfer within a company (Friedman, 2001). And the development of useful and positive knowledge for a company is only possible when the employees communicate their insights to the other employees (Huber, 1991).

The above literature shows that the learning within an organization, and therefore the knowledge transfer process, is dependent upon the information sharing between the employees in the company (Cohen & Levinthal, 1990). However, Bresman, Birkinshaw and Nobel (1999: 442) have found that “individuals will only participate willingly in knowledge exchange once they share a sense of identity or belonging with their colleagues”. After mergers and acquisitions, employees might not feel this sense of identity or belonging with the employees that were working for the other company and this problem might be even larger after international mergers and acquisitions. In the process of international knowledge sharing between employees, the knowledge that is available in the company will be transferred across borders so that the company is able to create new knowledge internationally (Macharzina, Oesterle & Brodel, 2001). Since employees are used to the customs of their national culture, the willingness to share, transfer and apply knowledge will be low.

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2.3.3 The Effects of Power and Control on Knowledge Transfer

Rothman and Friedman (2001) have found that the effects of conflicts and power struggles are not often considered in research on organizational learning or knowledge transfer. The reason for this literature gab is that both managers and students at business schools believe that in today’s business world decisions are made rationally by managers, the employees are empowered and differences in power within organizations are not present or at least not acted upon (LaPalombara, 2001). However, the research done by Coopey (1995) shows that the structure of power does have a great influence on the capacity of companies to learn. Other authors (e.g., Snell & Chak, 1998; Vince, 2001) agree with Coopey that asymmetric and symmetric power relations are important concepts and not enough studied upon in relation to organizational learning or knowledge transfer. This research on the effects of the amount of control or power of the acquirer over the acquired after an international merger or acquisition on the efficiency and effectiveness of the knowledge transfer process is therefore an important addition to the current literature. The findings might either build upon the current beliefs of managers and business students or give counteracting arguments.

2.3.4 Knowledge Transfer Processes in Relation to Acquisitions and

Mergers

Bresman, Birkinshaw and Nobel (1999) suggested that further research was needed to see how the knowledge transfer process differs with different governance structures. This section will therefore focus upon the relation between knowledge transfer processes and mergers and acquisitions. Previous research shows both positive and negative effects of

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mergers and acquisitions on the knowledge transfer process. These effects will be discussed, were after this section will elaborate on the differences between mergers and acquisitions. After this discussion, the final set of propositions will be presented.

2.3.4.1 Positive effects

Knowledge can be developed internally in a company through interaction between the employees within the company. The development of knowledge internally can both be substituted and complemented with the development of knowledge through external channels. This can be done, for example, through the education of the employees, the hiring of new employees and through mergers and acquisitions. Mergers and acquisitions allow a company to acquire new resources and competencies. These new resources and competencies in turn allow new knowledge to be transferred within the company (Prahalad & Hamel, 1990).

As explained in the introduction, acquisitions and mergers are often used to enlarge the knowledge base of a company. The acquired knowledge through mergers and acquisitions can then be transferred through the whole company. To gain competitive advantage over competitors, growing and enlarging the knowledge base through organic growth is often not sufficient and fast enough. Acquisitions and mergers are then a faster and more attractive way to acquire and transfer knowledge (Bresman, Birkinshaw & Nobel, 1999).

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Greenfields, since there are less political, social and economical barriers to entry. Through the low level of entry barriers with mergers and acquisitions, the entry into the new market goes relatively fast, which can enhance the competitive advantage. Finally, new knowledge, capabilities and resources can be acquired more easily and faster, which again enlarges the competitive advantage of the company.

The transfer of the new knowledge and capabilities acquired after a merger or acquisitions will enable a company to look at things in a different way than they would have done without these resources. When new knowledge shows to be more applicable to today’s business world, the transfer and implementation of the new knowledge will improve the performance of the company. Acquisitions and mergers, therefore, improve the ability of companies to react to changes in the business world in the best way (Haspeslagh & Jemison, 1991). Although the negative effects of the different cultures after a merger or an acquisition are often discussed (and will be discussed in further detail in the next section of this chapter), tensions and discussions that arise through differences in culture can also enhance the knowledge base of a company. Through the tensions and discussions, employees are forced to look outside the thinking patterns of their own culture, which can change the ideas and behavior of the employees. This change in attitude towards problems can break the inflexibility of the acquiring company. Furthermore, in their research on top management teams, Krisnan, Miller and Judge (1997) found that the merger of dissimilar top management teams instead of similar top management teams creates more opportunities for synergies and learning.

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2.3.4.2 Negative effects

Schein (1996) found in his research on the comparison between executives, engineers, and operators that companies are often composed of a set of different subcultures. These subcultures can not only be subscribed to different professions of the people within the organization, but also to the hierarchical layers or organizational units within a company. Also due to a merger or an acquisition different subcultures can develop between the previously independent organizations. And, as stated by Berthoin Antal, Lenhardt and Rosenbrock (2001: 868): “If the members of the subcultures do not understand each other’s terminology, metaphors, or stories, organizational learning will be impeded”. Mergers and acquisitions might therefore, due to the different organizational cultures of the previously separate organizations, negatively affect the knowledge transfer process.

Another viewpoint to look at the effects of mergers and acquisitions on the knowledge transfer process is through the concepts of exploration and exploitation. March (1991) has developed these concepts and defines them in the following way:

“The essence of exploitation is the refinement and extension of existing competencies, technologies, and paradigms. Its returns are positive, proximate, and predictable. The essence of exploration is experimentation with new alternatives. Its returns are uncertain, distant, and often

negative.” (March, 1991: 85)

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In order to be able to detect and use valuable knowledge, a firm needs to have absorptive capacity. Detecting valuable external knowledge, adapt it to internal use and to actually use it, is essential for a firm to be innovative and enhances the effectiveness and efficiency of the knowledge transfer process (Cohen & Levinthal, 1990). There are several options for companies to develop or acquire absorptive capacity. Through education and guidance, absorptive capacity can be developed internally but it can also, for example, be acquired through a merger or an acquisition. Cohen and Levinthal (1990) have found in their research that the effectiveness of this later option is lower for the knowledge transfer process, since it takes more time to adapt this absorptive capacity to the needs and procedures of the company.

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2.3.4.3 Different effects of mergers and acquisitions and different degrees of power and control

Mergers and acquisitions are often mentioned in one breath. A search into the databases of Business Source Premier and Econlit on the EBSCOhost search engine (EBSCOhost) on the term ‘M&A’ in the title of journal articles in the subject field of mergers and acquisitions already shows 6307 results. A search on these databases on the differences between mergers and acquisitions, on the contrary, only gives one article of the HR Focus. The difference between these search results clearly shows that previous research often has taken mergers and acquisitions together as one variable in their research.

However, there is a difference between mergers and acquisitions. A merger is an integration of two companies of a similar size that are merging into a new, and different from the two previous, entity. On the contrary, an acquisition is the situation where a larger company acquires a smaller company, which will then be integrated into the larger company (HR Focus, 2002).

The difference between a merger and an acquisition is therefore the difference degree of power and control one party has over the other. The power distribution after a merger is relatively more equal compared to the power distribution after an acquisition. With an acquisition, the acquirer has clearly power and control over the acquired party. When referring back to the literature elaborated upon in subchapter 2.3.3 on the effects of power and control on the knowledge transfer process, the little research that is done into this field suggests that there is a different effect due to the differences in power distribution with a merger and an acquisition. The literature suggests that, due to the larger power differences of the two parties after an acquisition, the efficiency and effectiveness of the knowledge transfer process will be worse compared with after a merger. Furthermore, this suggests that the negative effects of mergers and acquisitions on knowledge transfer seen in the literature are more often related to acquisitions and the positive effects of mergers and acquisitions on knowledge transfer seen in the literature are more often related to mergers.

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2.4 Conclusion from the Literature Review

This literature review has both shown what is known in the literature about the different concepts that are related to the research question and has developed a set of

Proposition 4: The higher the power inequality between units, the lower the efficiency and effectiveness of the knowledge transfer process between employees.

Proposition 5: Power is more unequally distributed after an acquisition than after a merger.

Proposition 6: The differences in the literature on mergers and acquisitions are related to the differences between mergers and acquisitions. The negative effects of mergers and acquisitions on knowledge transfer seen in the literature are more often related to acquisitions and the positive effects of mergers and acquisitions on knowledge transfer seen in the literature are more often related to mergers.

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propositions in the theory developing phase which can be tested in the analysis to answer the research question. The theory building phase suggests that the amount of power or control the acquirer has over the acquired, after an international acquisition or an international merger, impacts the efficiency and effectiveness of the knowledge transfer process between employees in such a way that the higher the power inequality between the units, the lower the efficiency and effectiveness of the knowledge transfer process between the employees.

This expectation is called a “deterministic relation” by Dul and Hak (2008: 69), in the sense that a continuous decreasing relation (ceteris paribus, the efficiency and effectiveness will become lower when the power inequality increases) is expected between the concepts power inequality and the efficiency and effectiveness of the knowledge transfer process. A simplification of this relationship is visualized in the following graph (Figure 7)

Figure 7

Expected Deterministic Relation Between Concepts

Source: (Dul & Hak, 2008: 70)

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3. METHODOLOGY

As stated by Dul and Hak (2008: 64): “If the proposition has not been tested before, initial testing is needed to confirm that there is at least one situation in which the proposition is true”. The objective of the theory testing phase of this study is, therefore, to contribute to the development of the theory of the effects of the power distribution after mergers and acquisitions on the knowledge transfer process by testing the propositions developed in the theory development phase. In the theory testing phase, the propositions will be tested with qualitative case studies.

The choice to use a case studies instead of another research strategy or method such as a survey was made because of the thoroughness of case studies. The aim of case studies is to “provide an analysis of the context and processes which illuminate the theoretical issues being studied” (Hartley, 2004: 323). As Yin (2003: 1) explains in his famous and often cited book on case study research: “Case studies are the preferred strategy when “how” or “why” questions are being posed, when the investigator has little control over events, and when the focus is on a contemporary phenomenon within some real-life context”. The fact that this research contains all the above mentioned features shows the appropriateness of case studies for this research. A thorough case study will enable me as a researcher to get a full understanding of the firm under study and its features concerning the propositions. This will enable me in the best way to test the applicability of the propositions and to further strengthen or (re)formulate them.

The case studies consist of semi-structured interviews with experts in the field of mergers and acquisitions. These semi-structured interviews will be combined with a documentary analysis. Examples of possible documents that can be used are documents on the different knowledge transfer processes before the merger or acquisition and after.

Hereafter, the results of the theory-testing case study will be used for further strengthening or (re)formulating the propositions.

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provide managers with information that they can use in their decision-making on entering either into a merger or an acquisition. Furthermore, the propositions that are refined or further strengthened due to the initial testing can be used as an input for a replication study to increase the robustness and generalizability of the theory on the effects of the power distribution after international mergers and acquisitions on the knowledge transfer process.

3.1 Case Study

The necessary data are collected through multiple case studies. The cases will consist of experts in the field of mergers and acquisitions.

The companies in the case studies were contacted through telephone and e-mail and were explained the purpose and the added value for the academic and business world of this research. Through these contacts, where possible, a date was scheduled for a face-to-face interview at a place most convenient for the interviewee. All these interviews have taken place between April and June 2009. Where possible, documentary data was collected as potential source for triangulation.

3.2 Reasoning Behind the Cases

Ghauri (2004) found that cases should be selected based on criteria that are related to the research problem at hand. The cases should therefore relate to the different concepts in this research and the propositions developed after the theory building phase. The criteria for selecting the companies were as follows:

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the merger or acquisition or to be knowledgeable of the effects of the mergers or acquisitions.

As can be seen below, the cases are experts in the field of international mergers and acquisitions. The decision to focus on experts instead of companies that have experienced a merger or an acquisition is made because of the ability of these experts to compare international mergers with international acquisitions. During the search for appropriate cases, it became evident that most companies willing to cooperate with this research that have experienced mergers or acquisitions have not experienced an international merger and international acquisition that can easily be compared. On the contrary, consultants in the field of mergers and acquisitions do have dealt with both international mergers and acquisitions. The fact that they are familiar with different examples of international mergers and acquisitions enhances the ability of this research to test the propositions with real examples. Furthermore, the consultancy firms are better able than the companies who are involved in the merger or acquisition themselves to understand the theoretical models behind the effects of the mergers and acquisitions. Therefore, their knowledge is valuable for testing the propositions as stated above.

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In total, an amount of five cases is chosen for the analysis. This amount of cases, combined with the diversity of the cases as explained below, was chosen to ensure different insights are incorporated in the analysis.

3.3 Interviews

This section of the paper elaborates on the interviews. The background of the companies cooperating with these interviews and the specific participants of the interviews are discussed, where after the procedure of the interviews is set out.

3.3.1 Background of Companies

Denies is a German-Dutch service centre for language and communication. The aim of this organization is to encourage and improve the cooperation between companies and organizations from the Netherlands and Germany. This is done through consultancy work, training and coaching (Denies, 2009). Through these services, Denies has insights in the international cooperation and barriers to this cooperation between firms in the Netherlands and Germany.

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Deloitte Touche Tohmatsu is an accountants and consultancy organization (the Swiss Verein DTT) located in 136 countries around the world. Under the better known brand “Deloitte”, services are provided ranging from auditing, financial advisory services, risk management, tax services and consulting (Deloitte – About Deloitte, 2009). The consultancy branch of Deloitte, which was approached for this research, is with its more than 22.000 management consultants, one of the largest management consulting organizations. In the Netherlands, Deloitte has more than 6.000 employees and a total revenue of €697 million, which makes Deloitte the largest accounting and consultancy firm on the Dutch market (The Consultancy Group – Deloitte, 2009). In the consultancy branch, the Dutch Deloitte Consulting B.V. is active in the areas of strategy consultancy, business consultancy and IT consultancy. In the strategy consultancy area, one of the services provided are the ‘M&A Integration Services’. As stated on their website: “Deloitte’s approach on Merger Integration includes services and proven tools which will help to create and capture value throughout the M&A life cycle from idea inception through integration” (Deloitte – M&A Integration Services, 2009).

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Berenschot is a Dutch-based independent consultancy firm with around 450 employees in the Benelux (BElgium, NEtherlands & LUXembourg) and was founded in 1938 (Berenschot – Our consultancy, 2009). One of the services in their Strategy & Marketing field is on post-merger integration. As they stated on their website: “Berenschot has the necessary practical experience with integration. We also have the necessary in-house knowledge to support […] in all aspects of the integration process, such as HRM, remuneration, communication, operations and change management” (Berenschot – Expertise, 2009).

3.3.2 Participants

The people interviewed for the case studies are presented in table 2. With the first contact to the firm by e-mail or telephone, the purpose of the research was explained. Together with this explanation, the person who was initially contacted in the firm was asked to assess which person within the company would be most suitable, able and willing to participate into this research. As can be seen from the table, the participants are all managers or directors in their company and organization and can be assumed to have sufficient experience and knowledge in their field of expertise.

Table 2 Case Participants

Case Participant Function

Denies Mrs. Drs. B. Fabich Director and owner of Denies. Trainer and coach in German-Dutch communication, German language and Dutch language in practice and market orientation and development.

Hay Group Mr. H. D. Koning Director

“KNOWLEDGE IS POWER”