Test subjects developed descriptive languages
to quickly distinguish similar-appearing office scenes.

Codes, culture clash, and corporate merger compatibility

(Adapted from an article by Kim Matsunaga, writer for the Division of the Humanities and Social Sciences)

Who can forget the turf of preppies, geeks, and jocks in the school cafeteria? Visible and behavioral cues make it readily apparent who is “in” and who is “out” of a particular crowd, suggesting a structure of distinctive cultures. Companies are similarly driven by culture. Corporate culture may be deliberately expressed through architecture, workplace fashion, institutional structures, jargon, and title nomenclature.

At Caltech, Colin Camerer, Axline Professor of Business Economics, conducts experiments in behavioral economics to demonstrate the measurable influence of corporate culture on companies, and uses this information to predict corporate compatibility in mergers. According to Camerer, the impact of culture in the corporate environment is becoming increasingly important. Effects can
be positive, as in the case of Southwest Airlines, whose employees actually accept lower wages than their industry counterparts in order to be part of the upbeat working environment. Cultures that pro-mote risky and aggressive accounting and legal maneuvers, however, can negatively affect company performance, as recently observed at Enron and WorldCom.

Camerer’s research approach is one that anthropologists call “functionalist,” meaning that he studies a culture by examining the functionality of its various elements, such as how a particular company’s culture enhances economic efficiency, or how it resolves problems.

One way to study organizational culture is to create it in the laboratory. Camerer and his researchers have focused on the communication aspect of “codes”—in particular, slang—because they are easy to synthesize and measure in a lab. Examples of such codes include emergency-room jargon (“stat,” “NPO”), used to communicate highly specialized information with precision and conciseness; the slang of teenagers and rappers (“whatever,” “fuggedaboutit”); government acronyms; and academic language. The phrase “Does he drink the Kool-Aid?” is used at Microsoft as a measure of corporate loyalty, alluding to the cyanide-laced drink used in the 1978 Jonestown mass suicide.

Camerer’s team observes experimental subjects as they create specialized languages in response to simulated situations. Subjects, paired up as “manager” and “employee,” are separated by a partition and both are given a set of identical pictures of office scenes. In each round, the manager, who was given a certain sequence of pictures, must verbally communicate the order of the pictures as quickly as possible to the employee, who has a differently arranged set. The study’s objective is for subjects to develop a common language to accurately identify pictures in the shortest time possible—resulting in a tacit, shared understanding resembling a simple form of corporate culture.

Like cultural practices, the internal language developed by the subjects is an important source of efficiency and also a source of potential conflict, as players using different codes will choose more slowly. Also, because the language arises through shared experience, it is likely to be idiosyncratic and to differ between “firms,” even though each language may be equally efficient. “Good” cultural codes pick out a picture’s special features, are brief, and are often memorable. For example, subjects described the Figure 1 scene variously as “cubicles,” “headphones,” and “telemarketers.” In another picture, a businessman is gesturing with his hands outstretched. One group called this picture “Macarena,” because the gesture resembled a move in the faddish 1990s dance.

Errors in judgment when large corporations merge can be colossal, as in the recent $40 billion loss suffered by culturally polarized Time-Warner and AOL. Quite possibly, market analysts—tightly focused on the additive value of the two company’s assets—failed to predict inherent problems in marrying a traditional, vertically structured culture with one of youth, spontaneity, and lateral power distribution.

In one study of how conflicting cultures may cause problems, Camerer and Roberto Weber, of Carnegie Mellon University, conducted 20 rounds of tests on two pairs of subjects, each of whom alternated in the roles of manager and employee. Initially, the time to complete the task averaged 249 seconds, but by round 20 it had decreased to an average of 48 seconds. Next, the pairs were merged. A manager and one employee were retained from the “acquiring” firm, and one employee was kept from the “acquired” firm. The manager then attempted the same task as before, this time communicating with two employees, for 10 rounds. From the last premerger round to the first postmerger round, average completion times increased from 48 seconds to 130 seconds, showing that merging two firms led to persistent decreases in efficiency due to cultural differences and the difficulty of establishing a common language.

The impact of organizational culture on mergers can thus have profound real-world market implications, and Camerer would like to see a kind of test designed to help firms determine whether their cultures are compatible—perhaps avoiding the enormous losses in personnel, down time, and stock value recently seen in corporations formed by culture-blind mergers. The work he and his colleagues have done shows that merely calculating the sum value of merging lucrative companies does not automatically lead to business growth. Human organizations are influenced by human behavior, and cannot be simply and predictably added together.
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