Corporate-level strategy (Kanter, 1984; 1987; Goold, Campbell, and
Alexander, 1994; Hax and Majluf, 1996; Porter, 1996; Collis and Montgomery, 1997) is one of the important factors in the evolution of a firm
if that firm is seen as a complex adaptive system. It influences its development to a large extent and therefore also influences its success or
failure (Miles and Snow, 1994).
Following Porter’s recent argumentation, « strategy is the creation of a
unique and valuable position, involving a different set of activities »
(Porter, 1996: 68). He points out that the essence of strategic positioning is making trade-offs, that is, differing from one’s rivals in one’s
activities. Examples of corporate-level strategic problems are mergers,
acquisitions and alliances (Mueller, 1969; Davidson, 1985; Jemison
and Sitkin, 1986; Trautwein, 1990; Walter and Barney, 1990; Haspeslagh and Jemison, 1991; Eisenhardt and Schoonhoven, 1996). Mergers of big firms (mega-mergers) are highly complex corporate-level
strategic events that can only be understood from a holistic perspective (Pettigrew, 1990; 1995; Rühli and Sachs, 1999). To a large extent,
the fundamental principles of evolution developed in the last paragraph provide just such a holistic perspective.
CORPORATE-LEVEL STRATEGY FROM THE PERSPECTIVE OF HIERARCHICAL COMPLEXITY
Corporate-level strategic moves are often seen as top-management
decisions, in which the actors choose among different alternatives,
such as mergers, on the grounds of specific market signals. This view
represents a reduction to a limited number of linear causalities that
bears the danger of not providing an adequate explanation of a complex strategic development in reality. This danger is especially apparent in the case of a mega-merger since it is a strategic move that is
based on various hierarchical, functional as well as layer inderdependencies.
In real life, the decision to carry out a strategic move at the corporate
level highly depends on the interactions taking place on four additional
levels, namely the meme, business, alliance and society levels (Bower
and Doz, 1979; Nelson and Winter, 1982; Levinthal, 1994; Miner,
1994; Burgelman, 1996; Klein, Tosi, and Canella, 1999; Sachs and
The basic level of a firm’s evolution is the meme level (Sachs, Rühli,
and Schmitt, 1997). Core values are the most important component of
this level (Tushman and Romanelli, 1985; Collins and Porras, 1994).
They define a firm’s enduring character and are inert with respect to
changes in their basic tenets, a characteristic that has a tremendous
impact on a firm’s strategic development at the corporate level. Memes
guide the cognitive processes of strategic planning and therefore are
driving or buffering factors as to whether a merger will be in the realm
of actions open to a firm or not (Barham and Heimer, 1998). However,
the relation between the meme level and corporate level is of a reciprocal nature: A merger also influences the core values of a firm by
combining and recombining the existing values of two merging firms or,
by providing a source of new values, e.g., new top managers, who
spread new values throughout the organization and make existing
Additionally, there is the core values’ more indirect influence on a firm’s
strategic development at the corporate level. Core values influence the
middle managers’ contribution to corporate strategy and, consequently, the strategic outcomes at the corporate level. Core values are, in
turn, influenced by middle management, a proposition that has been
confirmed by the empirical studies previously mentioned in this article.
Research on corporate culture confirms that a firm’s core values and
the strategies they produce are also influenced by the values of different actors at the industry and society level (Gordon, 1991; Schneider
and de Meyer, 1991; Trice and Beyer, 1993). The levels outlined above
are also in a constant interaction with the industry and society levels.
The latter may judge mergers positively, which may make stability and
successful development possible. However, such approval may also
be seen as a negative development leading to undesirable monopolistic situations or loss of jobs. Depending on how a merger is perceived,
it leads to either cooperative or competitive situations between a firm
and its various (economic as well as societal) stakeholder groups.
One can conclude, from the above description, that in a merger, core
values have a multi-dimensional, and often hidden and indirect influence on corporate strategy, partly supporting strategic moves, partly buffering them.
Besides interacting with the meme level, the corporate level also interacts with the business level (Porter, 1987; Goold et al., 1994). Corporations are often multibusiness organizations. Within this structure, the
different businesses have a certain autonomy limited and influenced
by other organizational levels. Decisions at the business level, such as
the choice of a particular business strategy, also have an important
impact on the scope of strategic actions at the corporate level. A business-level decision may conflict with a merger decision at the corporate level. In this sense, middle management and its interaction with
top management are particularly relevant. As empirical analysis shows
(e.g., Noda and Bower, 1996), the importance and function of the
middle management in the process of strategy formulation at the corporate level is underestimated in current strategy theory. In fact, corporate strategy formulation is more often a bottom-up process than
A merger is a cooperative strategy employed by formerly independent
firms at the corporate level. But the relationship between the two previously separate firms may be characterized by cooperation at the corporate level and competitive elements at the business level. As a
cooperation leads to synergies, some business units may become
core businesses with strong core competencies or substantial market
power and a high potential for economies of scale. Other business
units, however, may be less important and less successful. Because
these less successful businesses compete for the same resources as
the core businesses, they slow down the whole entity’s pace of development. As a consequence, the weaker businesses are often sold
(Rühli and Sachs, 1999). A strategic move at the corporate level, such
as a merger, therefore strongly influences a firm’s business level. But
the opposite is also true: Newly formed business units define the limits
of future strategic moves at the corporate level. They redefine the
middle management’s structure of power by influencing the way in
which corporate strategies in post-merger periods are developed.
The corporate level is also interconnected with the industry level: An
industry’s structural development, especially as exemplified by the
behavior of important competitors, for instance the way they build
alliances, may force an individual firm to follow suit in order to avoid a
loss of market or innovation power (Chatterjee, 1986; Nelson, 1995).
On the other hand, a merger between two important actors within an
industry can change the whole competitive structure in this specific
industry as was the case in the pharmaceutical industry, in the telecommunications or in the airline business. Both competitive and
cooperative relationships are reconstructed (Grant and Cibin, 1995;
The same effect can be observed at the society level. As is known from
the debate on the political power of multinational corporations, mergers may have a tremendous impact on the society (political) level. On
the other hand, society regulates a firm’s behavior, for example by
takeover regulations or by reinforcing or limiting a firm’s merger behavior and therefore its strategic development (Wood and Gray, 1991;
Amit and Schoemaker, 1993; Blair, 1995; Sachs and Böhi, 1995). As
society normally focuses not on individual firms, but creates general
regulations, it has various indirect influences (via the industry, business or core-value levels) on a firm’s strategic evolution on each of the
five levels mentioned so far. Again, a firm’s evolution may include supporting (cooperative) elements and limiting (competitive) influences.
In the example of a merger, understood here as a complex adaptive
system’s crucial strategic move, our first principle of evolutionary thinking, which stresses hierarchical complexity, leads to a more elaborate understanding of the reciprocal, partly competitive (antagonistic),
partly cooperative (harmonious) interactions at the five levels of a
firm’s evolution. The basic interactions shown below in Figure 1
could be developed in more detail, providing an even higher degree of
In applying the hierarchical complexity principle on the merger issue, it
becomes evident that success and failure are caused by a large number of interactive and multilevel causalities.
Figure 1 -
Basic interactions at the five levels of a firm’s evolution
CORPORATE LEVEL STRATEGY FROM THE PERSPECTIVE OF FUNCTIONAL COMPLEXITY
Whereas hierarchical complexity focuses on structures, functional
complexity is based on processes and therefore concentrates on change and modification. Within a strategic event, in our case a merger,
existing orders are broken up by a disturbance cascading down the
organization and leading to a chaotic situation. In the course of adaptive variation and selection processes, new and different patterns of
order evolve and the newly merged firm may search again for its new
position in the transition region at the edge of chaos. Modern biological evolutionary theory also sheds light on the processes of a firm’s
evolutionary changes, which occur on all levels of evolution (Dawkins,
1989; Greeno and Robinson, 1992; Eldredge, 1995; Wilson, 1998). A
strategic change in a firm can be understood as one specific mode of
variation and leads, on the one hand, to internal selection that is carried out by a firm’s management and, on the other hand, to external
selection through the economic and societal environment (Nelson and
Winter, 1982; Baum and Singh, 1994; Fombrun, 1994; Levinthal, 1994;
Miner, 1994). A merger process is, according to this perspective, either
a sequence of emergent events, or something purposefully directed by
the management (or a combination of both).
A merger thus should not be seen as an isolated strategic move, but
as a sequence of events embedded in an evolutionary trajectory that
are taking place at different levels over the course of time. In an evolutionary process such as this, driving and buffering forces influence
the merger at different points in time. We have developed the point
elsewhere in more detail that an evolutionary view of the merger process provides new insights into the emergence of functional complexity, but we summarize this development in the paragraphs below. An
evolutionary approach provides a more systematic and comprehensive view of the merger process than is usually found in the literature
and the cases discussed there (Blake and Mouton, 1985; Jemison and
Sitkin, 1986; Schweiger and Ivancevich, 1987; Napier, 1989; Marks
and Mirvis, 1992; Haspeslagh and Jemison, 1994; Shanley, 1994;
Larsson and Finkelstein, 1999).
PATH DEPENDENCIES AND FIRMS IDENTITIES
At the beginning of a merger process, the two firms involved have different identities that are influenced by the individual path dependencies that result from their internal and external evolution. These identities are based on specific patterns of order. Complex adaptive systems
such as merging firms are continuously evolving and the decision to
merge catches the two firms involved “in flight”, in the middle of their
particular ongoing evolution. Because of these mechanisms, one has
to take into account that the merger candidates’ strategies originally
were not aimed at a merger. Therefore, prior to the merger, they have
gained a unique strategic position that is the result of their individual
strategic trajectory, a trajectory that now drives or buffers the merger
These mechanisms also have an effect on a firm’s structure. The merging firms’ specific path dependencies, corporate governance systems
and their basic organizational designs are usually different and normally have not been developed in the anticipation of a merger. The two
future partners may differ strongly especially in the core structures providing stability and autonomy and in the fluid organizational elements
providing flexibility and capacity for adaptation. Their position may differ substantially with respect to the edge of chaos.
The two merging firms’ core values (culture) exert an effect on the merger mechanisms as well. They are driving or buffering forces that
influence evolution in general and a merger in particular.
During the time before the merger itself takes place, the involved parties’ needs and capacities for change may differ substantially. The
merger candidates also have different degrees of autonomy to act with
respect to their changing specific positions in the fitness landscape, a
constellation that will be important for building the new firm’s identity.
Path dependencies, ongoing changes in the firms’ identity and the
firms’ specific positions in the fitness landscapes are the most important factors influencing the merger process and therefore in creating
THE MERGER PROCESS
At the very beginning of the merger process, disturbance cascades
down the organization when the two merging firms’ identities are combined. The formerly stable parts of their strategies, structures and cultures are destabilized, and the boundaries between order and chaos
are drastically changed. In a merger, strategies have to be coordinated, structures have to be integrated and values have to be adapted.
In an evolutionary perspective a merger creates a period of fundamental uncertainties with two major impacts. First, the merger opens
up a new and wider range of variation in the patterns of order as compared to the individual patterns that existed beforehand. The businesses of the previously independent firms can be connected in creative new ways, broadening the organization’s field of activity and
managerial discretion. Second, the increased need to select means
that new selecting forces gain a different impact on the evolution of the
newly created organization than they had before. New rules for internal selection processes, based on patterns of order, are important in
ensuring managerial discretion.
Merging firms are in a situation of increased chaos. In the search for
new patterns of order intended to reduce this chaos and in the attempt
to move back towards the edge of chaos again, it can be observed
— and this observation is confirmed in the literature we mentioned earlier—that the merged firm first, with great effort, creates a new legal
and organizational structure that is intended to serve as a point of reference. At the beginning, this may lead to a structure that leaves open
much room for subsequent self-organization. During this period of
time, the high degree of uncertainty can also be absorbed by nominating key persons. The case material mentioned earlier, however, also
shows that at the beginning of a merger, an elaborate strategy is mostly lacking. The merger is based on a few basic, often ambiguous, strategic ideas. The intent of the strategy and its trajectory are often clarified later by variation and selection in the coevolution of the two merging firms. As mentioned above, these mechanisms are based on core
values. Both the relevant literature and our own observation demonstrate that merging firms very seldom pay attention to the differences
between their core values. A general statement may be formulated,
expressing their beliefs in a form favorable for the merger. However,
this may be mere lipservice and not an expression of an actual new
corporate culture. In an unclear situation like this, employees may use
up their time and energy for years in the search for sense. Although
the identities of the former firms are destroyed, the newly created firm’s
identity is not yet developed nor is it accepted by its employees or its
other stakeholders. Seen in a positive light, this situation could represent a unique opportunity to strengthen the new firm’s fitness if the firm
purposely leverages the partners’ interdependencies in values. However, this opportunity is mostly wasted. It is therefore not surprising that
unsuccessful mergers are often explained by a lack of identity creation
as well as by missing unifying core values in statements by managers
as well as in the relevant literature. In an effort to compensate for the
absence of a genuine identity and to reduce uncertainty, too much
order may be established, which leads to less flexibility, and, consequently, to a firm missing the edge of chaos.
THE POST-MERGER PERIOD
Whereas the merger itself is a short burst of radical change, the evolutionary processes thereafter proceed at a slow, constant pace. The
case material suggests that normally there are only minor structural
variations and selections in the post-merger period. During this phase,
more intense variation and selection processes are at work on a firm’s
strategy and even more intensely on its corporate culture. Depending
on its stakeholders’ reactions and the remaining effects of the merger’s
variation and selection processes, a period of incremental change or
even one of stasis may follow, although there may also be a need for
relentless continuous change. The degree of uncertainty and chaos in
each case is lower than in the merger period itself. As the empirical
studies mentioned earlier and also practical examples demonstrate, it
may easily take several years to reach the edge of chaos again.
From the perspective of functional complexity, mergers are viewed as
a process in which individual evolution and the specific identities of
separate firms are, after a period of relative stability, interrupted by a
burst of radical changes, in the course of which strategies, structures
and cultures are modified at a different pace than usual as a consequence momentarily creating a high level of uncertainty and chaos.
The merger candidates’ different fitness landscapes are connected on
the basis of the new patterns of order. Initializing and guiding variation
and selection processes on purpose may ensure the new firm’s movement towards the edge of chaos and can even enlarge its evolutionary competence in reality. Traditional strategy theory hardly discusses
these evolving processes. The principle of functional complexity therefore seems of particular value for future developments in strategy process research.
CORPORATE-LEVEL STRATEGY FROM THE PERSPECTIVE OF LAYER COMPLEXITY
Strategy theory normally views mergers as moves to create or defend
sustainable competitive advantages in order to earn a strategic rent.
Furthermore, a strategic rent is measured mostly in economic or financial terms such as cash flow, shareholder value, stock prices, etc.
(Jensen, 1984; Davidson, 1985; Ravenscraft and Scherer, 1987;
Trautwein, 1990; Katz, Simanek, and Townstend, 1997; Sirower,
However, modern biological and evolutionary thinking demonstrates
that evolving systems are selected on the grounds of different categories of criteria involving different layers of judgment.
This priciple applies to internal selection that is purposely conducted
by employees or managers who are defending their values and beliefs.
These internal selection mechanisms and the accompanying criteria
are complemented by external ones like markets and society.
Firms are thus always judged according to a complex system of evaluation, including different categories of stakeholders from different
layers of a society. This is particularly true for a mega-merger, where a
strategic move leads to the construction of a new firm with substantial
economic and, possibly, political power. As we have demonstrated in
Rühli and Sachs (1999), the Novartis merger made it clear that the
firm’s exposure to its stakeholder groups is highly intensified around
events of such general interest. Although a certain decrease in a firm’s
exposure can be observed after a merger, the stakeholder interactions
remain more intense, which shows us that a turnover pulse situation
like a merger can change the intensity of stakeholder relations permanently. Therefore, both stakeholder theory and management have to
consider the fact that, in a post-merger phase, the selection pressure
exerted by stakeholders has to be weighed more heavily, which will, in
turn, have an effect on a firm's strategic, structural and cultural solutions.
Our frame of thinking therefore emphasizes societal as well as economic stakeholders, in the role of agents of judgements and selection.
With their unstable interests, demands and strategies, they confront a
firm with constantly changing, complex expectations that promote and
represent a broad range of selection pressures firms have to consider.
The most central source of a firm’s external assessment of success
and, consequently, selection, is represented by the laws of competition
in the marketplace. External complexity can therefore be purposely
created by one of the competitive arena’s leading actors in order to
gain a temporary competitive advantage.
Economic stakeholders, such as customers, suppliers, employees and
shareholders, strive primarily for economic value, which is reflected by
the tremendous impact that the announcement of a merger can have
on stock prices.
In contrast, societal stakeholders confront merging firms with demands
aimed at social and environmental sustainability with respect to a firm’s
activities and therefore, these stakeholders often refer to ethical norms
and values. In contrast to other concepts of strategy, evolutionary thinking focuses more heavily on the societal context’s significance in
developing and selecting strategies in a coevolutionary process with
the economic context. It therefore proposes an emphasis on the different layers of selection that are important in a firm’s evolution and that
the purely market-oriented view of strategy theory has so far neglected. Nowadays, societal awareness and fitness must be essential
points of great managerial concern, especially in a merger situation,
where this awareness can extend a firm’s evolutionary competence.
Firms thus are embedded in a network of stakeholders, who influences
their evolution through their changing economic and societal expectations. Guiding coevolution through multiple stakeholder management
thus ensures fitness and, consequently, strategic success.
Additionally, as mentioned above, modern biological evolutionary theory stresses habitat tracking as one way of acting within changing environments. This concept is particularly relevant for firms involved in a
merger. If a firm’s societal environment becomes disadvantageous
enough, firms, at one time of the radical change, induced by a merger,
may be reluctant to adapt, or, wishing to avoid being selected by a
changing environment, they may move their activities into more favorable countries or regions. Habitat tracking, for example, can also be
observed in the relevant case material when a firm is consolidating the
merger candidates’ analogous business units. The newly formed unit’s
location is often that in which the most favorable environmental conditions predominate. Current strategy theory has not developed this line
of thinking very far to date.
Considering what has been said so far, it becomes evident that the
principle of layer complexity sheds significant new light on processes
of strategic behavior in general and on the situation of a merger in particular.
Managerial discretion is thus enlarged by considering layer complexity. This implies a shift in managerial attention towards societal as well
as economic conditions for success or failure that have so far been
underestimated in traditional strategy theory.