In today’s fast-paced business world, mergers and acquisitions (M&A) are common strategies for growth and expansion. From pre-deal negotiations to post-deal integration, M&A demand careful financial and logistical planning that can leave leaders pulled in dozens of directions. One often discussed but frequently overlooked planning strategy is cultural integration in mergers and acquisitions.
Cultural alignment impacts
Too often lost in the shuffle or never considered, the success of these ventures frequently hinges on understanding and integrating companies’ cultures. Post-deal, organizations with notably distinct cultures can struggle to make decisions quickly or operate effectively:
- 70%-90% of M&A fail or underperform. A significant contributing factor is the lack of focus on cultural integration in mergers and acquisitions.
- According to McKinsey, 95% of executives describe cultural fit as critical to the success of integration. However, only 25% cite a lack of cultural cohesion as the primary reason integration efforts fail.
- Deloitte found culture was the cause of 30% of failed integrations. Despite this, organizations still sideline developing and aligning around a cultural integration approach and instead allow it to happen organically.
These same companies can then spend significant dollars and time, sometimes years, after the transaction, working to solve integration misalignments that can negatively impact employee retention, limit productivity and innovation, and stall projected growth.
Demystify and define culture
Why then are cultural alignment plans left to fall to a checklist item of “we’ll figure it out after the deal closes”?
One reason is that it’s difficult to plan for something that can be perceived as nebulous or subjective. Ask a dozen people to define company culture and you’ll likely receive twelve different answers on what they think culture isn’t. You’ve likely heard pizza parties; pool tables and happy hours aren’t culture. Hold onto these thoughts.
Culture is defined as a pattern of shared assumptions a group learns as it works together to solve external and internal challenges. In even simpler terms, it’s how things get done – really done – by the people within a company. This includes how employees manage unwritten norms, values and beliefs which direct rewarded behaviors. Important to note, these are all driven and set by leadership.
Think about your role and how you navigate within your company to accomplish your job. What are the workarounds, common knowledge shortcuts, or undocumented ways that allow you to perform daily tasks? This includes “this is what this really means” deciphered practices, expectations, and behaviors you didn’t know about when you joined as a new employee. All of these elements shape your experience and your company’s culture.
The culture triangle
World-renowned author and widely recognized as the founder of organizational culture, Edgar Schein further breaks down culture in his Organizational Culture Triangle. From the top of the triangle to the foundation, his model deconstructs culture into three parts:
Artifacts
Located at the top of the triangle are artifacts. These are visible things such as structures, processes and behaviors. At this level, artifacts are the surface of a culture and can be difficult to interpret. They are everything you see, hear, and feel when meeting a new group, including visible structures and processes, observed behaviors, interactions, and emotional displays. Imagine walking into a company as a visitor and seeing a pizza party taking place around a pool table during an afternoon happy hour. Sound familiar? All artifacts.
Espoused beliefs
Espoused beliefs sit in the middle of the triangle. Written or verbally promoted, these are what’s publicly announced around ideals, aspirations, and goals – things the group claims are important and that they are focused on living or achieving. They may, or may not, be consistent with observed behaviors and other artifacts found at the surface level. These include mission, vision and values platforms, handbooks, and strategic business plans.
Underlying assumptions
Finally, at the triangle’s base are underlying assumptions. They representwhat’s transpiring at the core, or heart, of a culture. Unlike artifacts and espoused beliefs, they are not easily seen or identified. Grounded in people’s thoughts, beliefs, perceptions, and feelings, these assumptions are the unspoken essence of how a group functions, things that aren’t uncovered with casual observation. They drive decisions and impact behaviors that then shape every action, or, as you’ll recall, “how things get done around here.”
Understanding these layers is essential before moving into assessing culture in real-world scenarios like integrating acquisitions.
Conduct a culture assessment
So, what are the practical applications of a culture assessment, and when should it take place in the M&A process? Once a shared understanding and definition of culture is reached, an assessment examining both the acquiring and merged companies’ cultures should be performed. The process goes beyond executive teams relying on general “feelings” of each companies’ culture. Instead, a formal assessment, conducted during the due diligence phase, should be used to evaluate cultural alignment.
A successful assessment focuses on developing and answering a series of questions, completing observations and executing interactive exercises – when possible – using the Organizational Culture Triangle’s artifacts, espoused beliefs, and underlying assumptions as a framework.
This is the time to ask probing questions about written or spoken policies, procedures and overarching statements such as mission, vision, guiding principles and values. How, if, when and where these stated beliefs are put into practice is uncovered through these questions, as well as observations and focus group work. Dialogue can help executives untangle any unspoken cultural norms around day-to-day expectations, activities, team dynamics, management behaviors, rewarded behaviors and readiness for change.
From the findings, a gap analysis then helps executive teams level up themes to inform an appropriate cultural integration plan with goals, actions, and an appropriate budget. This includes where and how to leverage areas of strength and alignment, while also preparing to mitigate potential cultural discrepancies that could slow progress toward value realization.
Chart a culture integration course
Paired with the assessment findings, by now, a clear picture as to which cultural integration approach is best suited for the success of the merger or acquisition should have emerged. There are a few options.
First, when a larger company acquires a smaller one, the smaller organization adopts the culture of the larger entity. The second approach is used when both companies maintain their unique cultures but work together to share best practices and resources. The third option can be challenging but is often the most beneficial in the long run. It’s when both organizations collaborate to co-create a new, cohesive culture.
Each approach brings with it pros and cons.
In normal circumstances, outside of M&A, evolving and shaping a culture is a journey. It’s not a checklist of one-and-done activities. Rather, it requires ongoing dedication, and even more so when combining two separate organizations.
Part of that process is managing expectations and committing sufficient resources to ensure that creating a strong culture stays top of mind among management and employee groups. Adaptations to a cultural integration strategy based on outcomes and feedback will likely occur, and that’s okay.
Why? When moving through a change of this magnitude, resistance is to be expected. Since organizational change starts at the individual level, it’s not at all likely that every employee within the acquiring and acquired companies will have a unified view of the change and move through it at the same time or speed. It’s for that reason that careful change management planning should be considered as a critical part of the cultural integration approach.
Within that change management planning, also remember that effective communication is one of many actions necessary to create awareness, desire, and knowledge among employees. It can be easy to lose sight of the importance of how internal communication helps build change agents. When done correctly, those change agents can even evolve into internal brand ambassadors who represent your culture internally and externally.
Conclusion
Successful M&A require more than just financial and logistical planning. A proactive, intentional understanding of both organizational cultures, driven by planning, persistence and patience, is key. By understanding the components of culture, conducting a thorough culture assessment and making informed decisions about integration approaches based on data, companies can better prepare for and navigate the complexities of M&A to ensure financial objectives are achieved.
To learn more on this topic, reach out to Falls & Co.
