What are the liabilities of culture?

One culture can evolve, two, however, will not. Merging two cultures well is supreme challenge that needs to be actively shaped and carefully managed.

Blending organizational cultures is an unnatural act—like splicing genes. Yet newly merged companies must act quickly to shape the evolving culture into a joint asset. Otherwise, they risk creating a nagging and compounding liability.

Ever since organizational culture was first recognized as a bona fide component of business performance, executives and managers have sought to turn this asset into a source of competitive advantage. As mergers and acquisitions continue to dominate the global business landscape, the culture issue is becoming more important than ever. Is it possible, for instance, to merge cultures by decree, or is it necessary to deal with an organization’s culture as a mature, complex organism that requires careful study and coaxing to evolve? Experience and research suggest that organizations that forget to recognize and treat culture as a formidable integration challenge will do so at their own peril.

WHAT IS CULTURE ANYWAY?

In business, the oft-quoted view is that culture is simply “the way we do things around here.” In fact, there are three “ways”: the way we deal with customers, the way we treat each other as employees and the way leaders and managers in the organization motivate, reward and develop people. These are the most visible attributes of corporate culture. If you observe how people in your organization dress, relate to one another, respond to customer queries and complaints, and talk about their performance, you will begin to discern the patterns of behaviour that make up and reinforce corporate culture.

However, noticing patterns is not the same as understanding what causes people to address each other curtly or effusively every morning, or to stop at nothing to delight certain customers while barely tolerating others. The more profound drivers that shape or influence culture include an organization’s history, values, shared beliefs and assumptions about the business it’s in.

Edgar Schein, one of the most eminent commentators on corporate culture, writes that “What really drives the culture—its essence—is the learned, shared, tacit assumptions on which people base their daily behaviour.” A corporate culture is not unlike a living organism. Just as individuals are mostly unaware of how their own personalities developed, so too have most corporations felt it unnecessary to examine the influences that have shaped their culture. We act out a certain culture quite easily, but most of us would be hard pressed to describe the roots of that culture.

IN BUSINESS, CULTURE MATTERS

In 1987, a large global engineering firm acquired a North American business that served different markets with essentially similar products and services. The core competencies of the two organizations seemed almost alike, making integration appear to be nearly seamless. After all, engineers around the world share certain professional traits, and both businesses had grown successful in a highly competitive, mature market.

This firm became our client five years after the integration. To our surprise, most managers in the firm—which now had a single head office and integrated manufacturing facilities—introduced themselves as being from the old ABC or XYZ Company. Each went on to describe in great detail how “things used to get done” in their old firm.

These discussions made clear why the company was having trouble in North America. Despite the integration, people were still identifying with their “old” culture. Five years after the deal they still had not plotted a new culture or “way of doing things” in the new organization. It took another two years and gut-wrenching changes for the new organization to overcome its initial lapse and begin to recognize the importance of creating a shared, evolved culture.

It isn’t only anecdotal evidence that reveals culture’s importance. So too does empirical research. In a landmark 11-year study, which led to the publication of Organization Performance and Culture, Harvard Business School professor and author John Kotter deduced that organizations with rich, healthy cultures achieved net income growth of 756 percent, versus a mere one percent for those with less-defined cultures. More recently, Watson Wyatt’s research in developing the Human Capital Index [Ivey Business Journal, Jan./Feb. ‘00] underscored the importance of nurturing strong people practices. It demonstrated that companies with superior scores in five key people practices had a 30-percent higher market value than other organizations. Companies that pay attention to culture are rewarded financially—through growth and value—and are seen as desirable places to work. AS a result, they attract the talent that will generate the next wave of growth and value.

CULTURES DON’T MERGE EASILY

A culture has the uncanny ability to resist change because it is deeply ingrained in the mindset of its protective owners. In fact, one might argue that the entire field of organizational development is predicated on this concept. Business author Steven Rhinesmith summed it up by saying that “the basic dilemma of organizational change is that it must be freely adopted by the people that it affects, who are likely to be against its introduction.” Despite this inherent difficulty, ignoring culture in a merger or acquisition is a classic mistake. “Management often views corporate culture issues as somewhat squishy,” says Professor Bob McGowan, chairman of the department of management at the University of Denver’s Daniels College of Business. “Like cold fusion, they think everything will work out.”

The direct implication of ignoring culture, or believing that “everything will work out” through cultural osmosis, can lead to serious disappointments. Although a shared culture may eventually emerge, it may not be the kind of culture the dealmakers envisioned at the time of the merger. Letting the new entity’s culture ride freely could lead to any of these scenarios:

1. The merger has been announced and all the financial details have been worked out during due diligence. A new organizational structure is put in place. But as people start working together, they realize that what matters to each of them is different. One company prizes efficiency and speed because their early success rested on their ability to get to market before their competitors. The other company, more established in its own markets, prizes quality and design over speed. Inevitably, company A recruited and attracted people who felt at ease in a fast-paced, risk-taking team environment. Company B, on the other hand, hired engineers who coveted awards and worked in isolation from each other. As the two cultures meet, it becomes apparent that one way of working has to prevail, or that neither speed nor quality will survive.
2. Faced with the inevitable laws of globalization, two financial institutions decide to join forces. Both CEOs are pleased because the cultures seem to be in synch—everyone on both sides talks genuinely about customer intimacy and technology as the engines of value creation. There is a strong team-based history and people in both organizations have groomed remarkably similar core competencies over the years. This is a match made in financial heaven.

It takes a few months before the deeper beliefs and assumptions that govern behaviour in both organizations become apparent—and reveal a potentially hazardous chasm. One company believed that it would only be able to secure a trusted partner by outwardly displaying teamwork; however, employees did not work as a team or preach value creation beyond the integration process. People in the second organization actually believed that turning their energy to global markets and technology would create customer value and growth. They accepted the fact that value creation is not just a concept but a way of conducting business. Would the shock of this discovery paralyze strategy and decision-making in the new entity?

Cultures might appear to be similar, but in fact no culture is a true replica of another. It is tempting to state, for instance, that French and German cultures are almost identical. Both are European neighbours with comparable standards of living and traditions. Yet beneath the surface, France has existed as a fairly homogenous country for 2,000 years, whereas Germany only became a nation in the 19th century. Therefore the political and cultural norms of the French have, in some cases, much deeper roots, and French motivations for doing these things may be quite different from Germany’s, as the political events of the 20th century in Europe clearly show.

The same principle applies to organizational icons and processes: They may look identical, but the emotional architecture that fuels the organization is certainly distinct, perhaps opposite. So the initial challenge for all organizations contemplating a merger is to understand that culture has deep roots that can’t be easily pulled out, examined and re-programmed to create a new shared culture. Creating a shared culture requires a subtler blend of art and science. It involves prudent discovery, inventing, reseeding and letting go.

DISCOVERY

(Completed during due diligence)

As they are about to merge or acquire, executives must think of themselves as explorers, not conquerors. They must carefully map out the features and forces shaping the organization’s culture. This is the time to ask questions, drill for information and travel the inquisitive trails that will slowly clarify the “whats” and “whys” of the existing cultures.

The objective of discovery is to gain understanding and formulate original thoughts for the future culture. By collecting anecdotes, opinions, facts and paying attention to the organization’s daily rituals, executives and managers can articulate the culture and, more importantly, how it came to be. In discussions with managers and employees, it is important to be able to explore the following themes:

• How do people greet each other (formally or informally)? What is the dress code? How do people answer phones? Do they use humour? How many internal meetings do they have and what is their purpose? Who must sign contracts on behalf of the company? Who deals with customers? These are all surface signals?

• To dig deeper, question the corporate history, all the way back to the founders. What were the original credos of the early corporate builders? Who were thought of and emulated as corporate heroes? How has their legacy been preserved in the firm?

• Finally, question the beliefs and assumptions that have developed over the past few years around customers, people and leaders. Why do people feel it necessary to meet daily to review operational priorities? What takes precedence in a crisis? How has the company vision been created and disseminated? How do people practices match up with the evolving business strategy? All these questions will reveal important clues about the crazy quilt that corporate culture often becomes.

INVENTING

(Completing during integration preparation or for the first 60 days)

Crafting an intended culture is one of the more difficult tasks during a merger or acquisition. Unfortunately, it is often one of the last tasks to be undertaken seriously; in many cases, it is an afterthought. In some cases, the culture is so fragmented that it seems impossible to achieve a compromise. Consider Dai-Ichi, two Japanese banks that had such dissimilar cultures it was decided to retain two separate human resources functions—one to look after each of the two entities. Yet to aim for compromise is also to aim for something only half-formed, a mixture that may or may not taste good, but which almost certainly won’t taste great.

To achieve greatness, the remaining executives must look beyond the existing culture and explicitly describe what they want the new organization to be and feel like. This can be expressed in a core purpose, core values or operating principles. The format is irrelevant, as long as the executives present a well thought-out picture of what the future culture will look like from the inside out—that is, not simply what people will do but why they will believe certain things to be right for the organization. It is important to keep an open mind. Managers and employees might need to unlearn what they have thought to be the lasting values of the organization in order to create a new and fresh order. This unlearning is painful, but cathartic. It allows culture to find its place as a living partner with organizational strategy and structure. By making the desired culture explicit, executives and employees can engage in an important dialogue about what they believe in. The best idea about the future culture can emerge from this dialogue, though they are still just ideas.

RESEEDING

(Starts during the first 60 days)

Why reseeding? Because changing the organization’s DNA is like taking a field that has been dedicated to growing corn or cereals and turning it into a vineyard. Experts will tell you it can be done, but deep inside you may sense that this won’t be an easy task. And it won’t be. Changing the culture will take years—not decades, but certainly years—and what you get at the end is unlikely to look exactly like the model that was envisioned in the conceptual phase. But the point is that the organization will have taken its destiny seriously enough to address the issue of cultural change. For the first time, it is directing its energy to create an intended culture. This reseeding process will combine deliberate and just-in-time interventions:

• Taking the ideas formulated in the conceptual phase and publishing them for discussion at formal and informal events. The creation of the new culture is a highly iterative process. Ideas must be re-examined, fine-tuned, discarded and redrawn again against a different backdrop before they are finally adopted
• Adjusting people or human resources practices so that they reinforce the new culture as it evolves. This includes rewards and recognition practices, selection, development and performance management. These adjustments must not surprise people. They must come just-in-time, as it becomes apparent to people across the organization that the old practices are no longer able to support the evolving culture. Introducing them too early could cause confusion or anxiety
• Creating a “personal learning history” for individuals to track how their own beliefs and assumptions are changing over time. Asking people to document their personal experiences and asking a coach (internal or external) to help interpret these experiences and place them in the context of the evolving culture can be extremely beneficial in creating a learning culture
• Communicating progress on the cultural front, for instance, by designing balanced scorecard-type measures that help employees and shareholders recognize the importance of non-financial performance indicators
• Organizing “culture clubs” around the company that will allow employees to keep their finger on the pulse of the culture in a specific business unit. An alternative method is to ensure that culture is an item for discussion and review at regular business planning events, and not just the purview of the HR function.

LETTING GO

(Post-integration)

Perhaps the most difficult task for organizations in the act of inventing their new culture is letting go of the old one. The process of reseeding the old culture helps overcome this potential trauma. But like living organisms, cultures find it hard to evolve to another state. They act as a spore—the reproductive cells of plants and micro-organisms—which can stay alive for decades or more after the plant itself has died, in the hope that changes to the environment will bring about another opportunity to flourish. The only way to eliminate this spore effect is to acknowledge its existence and help it dissipate over time.

In practical terms, it is not healthy if employees bottle up their feelings about the old culture. These feelings must be vented and validated. Only then will the softening effect of the new culture work its charm and convince most employees or managers that it is not worth “hanging on.” In our experience, middle managers experience the greatest difficulty at this stage. Why? Because they have been observing the covenants of the old culture in order to get ahead, and they may not want to unlearn the old ways of doing things while they still face unanswered questions about their own future. Helping managers work through this dilemma is a challenge the organization must face. The solution lies in a combination of four things: bringing in fresh voices at the middle management table, asking managers to champion the development of the new culture, assigning coaches to help with the transition and reinforcing positive behaviour. Evolving the culture should be seen as an important learning opportunity: Most managers want to be among the organization’s learning vanguard.