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Home > Mergers and Acquisitions Best Practice > Cultural Alignment and Risk Management: Developing the Right Culture

Mergers and Acquisitions Best Practice

Cultural Alignment and Risk Management: Developing the Right Culture

by R. Brayton Bowen

Executive Summary

  • Organization culture may vary in definition from country to country, but it is essentially the sum total of the behaviors and styles of the people who drive the system.

  • Organizations that properly align organization culture with business goals and objectives can realize up to 40% improvement in performance compared to peer and competitor organizations.

  • Generally, 80% of acquisitions and mergers fail to perform to management’s expectations, in most instances, because of a failure to understand and manage organization culture.

  • Organizational members have an innate knowledge of what is and is not working within the culture of the organization and, therefore, must be engaged in the process of building the right culture.

  • Culture changes within an organization require total mastery of the change management process.

  • Organization culture ultimately impacts the financial performance and long-term success of an enterprise.

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Introduction

The goal was to beat Microsoft at its own game. After rebuffing a takeover attempt by the giant corporation, Novell Nouveau went on an acquisition binge of its own. The strategy was to acquire a premier word-processing company that could rival Microsoft, and Microsoft’s “Microsoft Word” in particular. So, in 1994, Raymond Noorda, CEO for the then second-largest software company, acquired WordPerfect Corp. for US$1.4 billion in stock. Novell was to become a “software powerhouse,” delivering “stand-alone, software suites, groupware, and network applications that were to define new capabilities for information systems”, according to WordPerfect’s leading executive. Two years later, WordPerfect was sold for less than one-seventh of its original purchase price. The reason for the failed strategy: “The cultures were very, very different,” as reported by Novell’s successor CEO, Robert Frankenberg (The Wall Street Journal, 1996).

Taking the role of the dominator, management of Novell Nouveau assumed their ways and methods to be superior to those of WordPerfect. They eliminated the sales force, assuming the Novell Nouveau organization could assume the sales and marketing function, and went on to make a host of other mistakes. Indeed, their experience was similar to those of the majority of acquiring firms. Generally, 80% of acquisitions and mergers fail to perform to management’s expectations, and the overarching factor in most instances is a failure to understand and manage organization culture.

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Aligning Organization Cultures

What is Culture?

Culture can be thought of as the organizational context in which behaviors can be characterized and assessed. It is the environmental code that prompts people to act in certain ways to “fit in” at different levels and perform in “expected” ways. For example, customers entering a fine dining establishment understand they are expected to dress appropriately, deport themselves in a dignified manner, wait to be seated at an assigned table, and ultimately, pay a high price for the experience. Yet, there are usually no formal rules that are posted stating how guests are supposed to dress or how they are to behave. Once seated at their table with friends or other guests, they can adjust their behaviors to a more relaxed and interactive mode. This analogy equates to organizational cultures, wherein the overarching culture may prompt people to act one way, whereas once they settle into their own departments or business units, their behavior may change somewhat from the corporate norm. Bringing about change on an organization-wide basis requires considerable understanding of what is needed and why; and it requires superior change-management ability.

Elements of organization culture include: How people work together; how responsible they feel for the success of the enterprise; how ethically they behave; how people behave toward customers; how they feel about the quality of the company’s goods and services; how prideful they feel about the mission of the enterprise; and ultimately, how fulfilled people feel in having a say in the business or making a difference in people’s lives as a result of the work they perform. In the end, highly constructive and productive cultures lead to optimum outcomes.

Why Change?

More corporations are coming to appreciate that relationship marketing is leading to increased sales, as compared to transactional marketing. To effect a shift of such magnitude requires a carefully planned migration of both structural and cultural change. Companies such as Globus, the German based hypermarket; DM-Drogeriemarkt, a retail chemist; Southwest Airlines and Lufthansa, both commercial airline companies; and Ikea, the Swedish multinational home furnishing retailer—all have created cultural environments that have enabled them to be enormously profitable compared to their industry counterparts. In each of these organizations, employees work as teams. Management provides prescriptive guidance rather than restrictive direction. Employees are entrusted to do the right thing and encouraged to be the best at what they do, namely, providing customers not only with quality goods and services but also with great customer experiences.

Up to 40% improvement in performance can be achieved by changing organization culture. According to Stanford Business School professor, Jeffery Pfeffer, providing training, status equalization, employment stability, and strong recognition and reward programs can propel any number of organizations to enviable levels of success.

To remain viable and competitive, even service sector entities, for example utilities, financial institutions, and government services, are recognizing the need to shift from transaction-based systems to ones that are more relationship-focused. Such changes require enormous changes in organization culture, as well as in supporting structures, i.e., operational, technological, and policy structures. Because “structure follows strategy”, it is virtually impossible to make shifts in organizational culture unless changes in structure occur, as well, to support such seismic shifts.

When Is Change Necessary?

Nowhere is the need for cultural alignment more evident than in the case of acquisitions and mergers. What usually happens is that the acquiring entity assumes its culture to be superior to that of the entity being acquired, as in the case of Novell Nouveau, cited earlier. Rather than identifying and optimizing the most constructive aspects of the acquired organization’s culture, the culture of the acquirer subsumes the culture of the acquired organization. Consequently, the outcome is not unlike that of Novell Nouveau’s in acquiring WordPerfect. Equally, compelling circumstances exist when organizations are pummeled by downturns in the economy or paradigm shifts in industry standards and/or customer preferences. Organizational transformations are required to jumpstart the business concept or power-charge employees, propelling them in a new direction. Out of the ashes of the past must arise a new phoenix, if the organization is to transform itself into a vital resource for meeting, if not exceeding, customer needs and marketplace demands. Today, Starbucks, the international brand, roaster and specialty coffee retailer, which operates in 43 countries with approximately 15,000 stores, is being assailed by competitors offering cheaper alternative products. Under Howard Schultz, returning to the company as chairman and CEO, the company is adopting a turnaround strategy of providing customers not only with the distinctive Starbucks “experience,” and new innovations, but also, a can-do employee attitude. “Welcome to Starbucks! What can I get started for you?” is the greeting welcoming every customer. While it is still early in the game, the emphasis is on reigniting the emotional attachment customers have had in the past with the product and the people who are the face of the company.

Similarly, when organizations determine their focus must shift from product sales to customer satisfaction and retention, a significant change in organization culture is required. Employees need to be trained and empowered to improve the quality of goods and services, solve problems, and earn the respect and, ultimately, the loyalty of their customers. For example, in 1993, when CEO Louis Gerstner took the reins of IBM, the company had just lost US$8 billion. His challenge was to transform IBM from a stodgy, centralized, mainframe computer company, where customers were expected to come to “Big Blue” and turf wars among departments abounded, to a fast-paced, customer-focused, well-oiled machine, where employees were expected to work as a team to meet and exceed the needs of their customers. In Who Says Elephants Can’t Dance, Gerstner wrote, “Culture isn’t just one aspect of the game. It is the game. In the end, an organization is nothing more than the collective capacity of its people to create value.”

As organizations continue to grow globally, it becomes a virtual impossibility for management to be ever-present, critically focused on day-to-day operations. Instead, organization cultures must be designed that are conducive to teamwork, self-direction, ethical decision-making, and the achievement of outstanding results. Team members throughout the organizational system must share a vision and a passion that can only come from an organization culture that is carefully designed and ardently nurtured.

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A Model for the Ideal Culture

Organizational Awareness

Ask any employee about his or her organizational culture, and chances are the words chosen to describe the environment will range from “political,” “highly competitive,” “collaborative,” and “team-like” to “stressful,” “mission driven,” even “rewarding.” The collective wisdom of organizational members represents a sort of meta-knowledge about the behaviors exhibited as a result of the cultural context in which they function. These descriptors, in essence, paint a picture of how functional or dysfunctional an organization’s culture is and, in turn, how successful or unsuccessful the organization is as a whole in the way it operates. Moreover, it is this collective conscience, or meta-knowledge, that contains the answers as to how the organizational culture could and should be ideally.

Dimensions of Culture

Various models exist for assessing the culture of an organization. Perhaps the most widely used survey instruments have been developed by Human Synergistics International. Their Organizational Culture Inventory®, for example, measures 12 thinking and behavioral styles, which make up three groupings, termed the “constructive,” “passive-aggressive,” and “passive-defensive” styles. An “ideal” culture is “constructive” when the dominant organizational styles are “self-actualizing,” “achieving,” “humanistic and encouraging,” and “affiliative.” Summary results from completed assessments enable organizations to understand how their cultures operate and where improvements can be made to improve outcomes in a variety of areas, including employee/labor relations, customer relations, organizational performance, and profitability.

Blueprint for Change

The benefit of using such assessments as described above is that organizational leadership is better able to target areas for change. Knowing how the present organizational culture impacts on performance, and where enhancements can be made to improve performance can form the basis of a master plan, or blueprint for change. Moreover, by tapping into the collective conscience of the organization and enlisting the involvement of organizational members, leadership can manage the change process more effectively—simply put, it becomes a holistic process or a “bottoms-up-top-down” approach. In the end, the change effort is sustainable, because all organizational members understand what is needed and how to make it happen—more importantly, they become collaborators in the change process rather than victims or passive spectators. Any number of corporations, including American Eagle Outfitters, Disney, Men’s Wearhouse, and Hewlett Packard, have focused on organizational culture as a means of optimizing performance, while sparking the commitment and active engagement of their employees. They have adopted that strategy from day one, and it has been the foundation for success.

Further Implications

In addition to profiling the culture of an organization, management can extend the evaluative process to assessing the individual behavioral styles of organizational members. Consistent with the notion that “a chain is only as strong as its weakest link,” the behavior of every member of the organizational “chain” must be aligned with the desired profile of the organization’s ideal culture to ensure optimum results. Further, individual performance plans should be honed to include the behavioral norms expected of organizational members, and periodic reviews conducted to help determine how well behaviors are aligned, and where improvement in individual behavioral styles is needed.

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Conclusion

In a global economy that is becoming more complex and conflicted, there is little room for error, and even less room for guess work. Organizational culture is as critical an element in managing a business as information technology, or financial controls. Indeed, it is more elusive but equally powerful to ensuring the success of an enterprise. The experience of a Novell Nouveau and WordPerfect proves how costly the neglect of organizational culture can be to the financial performance of a business. By way of contrast, those organizations that consciously tend to the process of building the right organizational culture have reaped rewards well beyond those achieved by their peer and competitor organizations.

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Making It Happen

Culture change requires a strategic perspective on why culture is important to the organization, and how it will make a significant difference in the strategic positioning and success of an enterprise. The process begins with articulation of the vision and mission of the organization. To achieve optimum performance, the culture of the organization needs to be aligned with the vision, mission, and strategic goals and objectives of the organization. The behaviors of senior leadership must model the new standard, and the change and implementation process must begin with senior leadership.

  • Conduct a system-wide assessment of the organization’s current culture.

  • Determine where change is necessary and why.

  • Profile the desired culture of the organization, ensuring that the targeted profile will bring out the best in the organization.

  • Engage organizational members in the processes of assessing the current culture, profiling the desired culture, and implementing needed change.

  • Incorporate the desired behavioral styles into the performance planning and management process for both individual members, and the business as a whole.

  • Continue to assess progress versus plan. Be certain to obtain feedback from key stakeholders such as customers, vendors, and investors, and make adjustments as needed to improve results.

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Further reading

Books:

  • Bowen, R. B. Recognizing and Rewarding Employees. New York: McGraw-Hill, 2000.
  • Cameron, K. S., and R. E. Quinn. Diagnosing and Changing Organizational Culture: Based on the Competing Values Framework. San Francisco, CA: Jossey-Bass, 2005.
  • Driskill, G. W., and A. L. Brenton. Organizational Culture in Action: A Cultural Analysis Workbook. Thousand Oaks, CA: Sage Publications, 2005.
  • Gerstner, L. V. Who Says Elephants Can’t Dance: Leading a Great Enterprise Through Dramatic Change. New York: HarperCollins, 2002.
  • Hennig-Thurau, T., and U. Hansen (eds). Relationship Marketing: Gaining Competitive Advantage Through Customer Satisfaction and Customer Retention. New York: McGraw-Hill/Irwin, 2000.
  • Pfeffer, J. The Human Equation: Building Profits by Putting People First. Boston, MA: Harvard Business School Press, 1998.
  • Schein, E. H. Organizational Culture and Leadership. 3rd ed. San Francisco, CA: Jossey-Bass, 2004.

Articles:

  • Barriere, M. T., B. R. Anson, R. S. Ording, and E. Rogers. “Culture transformation in a health care organization: A process for building adaptive capabilities through leadership development.” Consulting Psychology Journal: Practice and Research 54:2 (2008): 116–130.
  • Clark, D. “Novell nouveau: Software firm fights to remake business after ill-fated merger.” Wall Street Journal (Midwest ed) 76:62 (January 12, 1996): A1, A6.
  • Kavita, S. “Predicting organizational commitment through organization culture: A study of automobile industry in India.” Journal of Business Economics & Management 8:1 (2007): 29–37.

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