Managing Organizational Culture during Mergers - Principles of Management

Along with changing and strengthening an organization’s culture, managers need to keep a watchful eye on culture throughout the process of mergers and acquisitions. The corporate world is littered with mergers that failed or had a difficult gestation because of clashing organizational cultures. Various studies report that between 60 and 75 percent of all mergers fail to return a positive investment (Figure below). Often corporate leaders are so focused on the financial or marketing logistics of a merger that they forget to audit their respective corporate cultures.

The marriage of AOL Time Warner is one of the most spectacular recent examples. In theory, the world’s largest merger offered huge opportunities for converging AOL’s dominance in Internet services with Time Warner’s deep knowledge and assets in traditional media.

Merger Mania

Merger Mania

Instead the two corporate cultures mixed as well as oil and water. AOL’s culture valued youthful, high-flying, quick deal making. People were rewarded with stock options. Time Warner, on the other hand, had a buttoned-down, hierarchical, systematic culture. Executives were older, and the reward was a decent retirement package (affectionately known as the “golden rubber band” because people who left invariably returned later in their careers for the retirement benefits).

Organizational leaders can minimize such cultural collisions and fulfill their duty of due diligence by conducting a bicultural audit. A bicultural audit diagnoses cultural relations between companies and determines the extent to which cultural clashes will likely occur.

The bicultural audit process begins by identifying cultural differences between the merging companies. Next the bicultural audit data are analyzed to determine which differences between the two firms will result in conflict and which cultural values provide common ground on which to build a cultural foundation in the merged organization. The final stage involves identifying strategies and preparing action plans to bridge the two organizations’ cultures.

Strategies for Merging Different Organizational Cultures

STRATEGIES TO MERGE DIFFERENT ORGANIZATIONAL CULTURES

In some cases a bicultural audit results in a decision to end merger talks because the two cultures are too different to merge effectively. However, even with substantially different cultures, two companies may form a workable union if they apply the appropriate merger strategy. The four main strategies for merging different corporate cultures are assimilation, deculturation, integration, and separation (see Figure below).

Assimilation Assimilation occurs when employees at the acquired company willingly embrace the cultural values of the acquiring organization. Corporate cultural clashes are less likely to occur with this strategy because the acquired company often has a weak, dysfunctional culture, whereas the acquiring company’s culture is strong and aligned with the external environment.

Research in Motion (RIM), the company that makes Blackberry wireless devices, applies the assimilation strategy by deliberately acquiring only small start-up firms. “Small companies…don’t have cultural issues,” says RIM co-CEO Jim Balsillie, adding that they are typically absorbed into RIM’s culture with little fuss or attention.

Strategies for Merging Different Organizational Cultures

Strategies for Merging Different Organizational Cultures

Deculturation Assimilation is rare. Employees usually resist organizational change, particularly when they are asked to throw away organizational values that were similar to their personal values. Instead acquiring companies often apply a deculturation strategy by imposing their culture and business practices on the acquired organization. They strip away artifacts and reward systems that support the old culture.

People who cannot adopt the acquiring company’s culture are often terminated. Deculturation may be necessary when the acquired firm’s culture doesn’t work but employees aren’t convinced of this. However, this strategy is difficult to apply effectively because the acquired firm’s employees resist the cultural intrusions from the buying firm, thereby delaying or undermining the merger process.

Integration A third strategy is to combine the cultures into a new composite culture that preserves the best features of the previous cultures. Integration is slow and potentially risky because many forces preserve the existing cultures. Still, this strategy should be considered when acquired companies have relatively weak cultures or when their cultures include several overlapping values. Integration also works best when people realize that their existing cultures are ineffective and are therefore motivated to adopt a new set of dominant values.

Lockheed Martin provides a good example of the cultural integration strategy. The aerospace giant was created in the mid-1990s from the merger of 16 companies. Some of these firms had previously been accused of unethical conduct in government procurement contracts.

When these diverse cultures were integrated, senior executives wanted to be sure that the emerging culture emphasized ethical conduct. To accomplish this, they adopted six core values that represented both the company’s culture and its ethical standards: honesty, integrity, respect, trust, responsibility, and citizenship.

Separation A separation strategy occurs when the merging companies agree to remain distinct entities with minimal exchange of culture or organizational practices. This strategy is most appropriate when merging companies are in unrelated industries or operate in different countries:

The most appropriate cultural values tend to differ by industry and national culture. However, this separation strategy doesn’t usually last long because executives in the acquiring firm have difficulty keeping their hands off the acquired firm. According to one survey, only 15 percent of acquiring firms leave the acquired organization as a stand-alone unit.

One recent situation in which the separation strategy was applied is Cisco Systems’ acquisition of Linksys. Cisco Systems, the California-based Internet equipment maker, has acquired approximately 90 companies over the past two decades, most of them small, privately held start-up firms with technical expertise in high-growth niches compatible with Cisco’s own products. For most acquisitions Cisco assimilates the smaller firms into its own culture.

Linksys, the home wireless network company, was an exception. Linksys employs 400 people and was just a few years younger than Cisco. Furthermore, unlike Cisco, Linksys had developed a low-cost business with mass-market retail channels.

To avoid disrupting its success, Linksys was kept separate from Cisco. Cisco executives were so concerned that Linksys should retain its existing culture that a “filtering team” was formed to prevent Cisco’s culture or its leaders from taking over the smaller enterprise. So far the separation strategy has worked. Linksys continues to thrive in a competitive low-cost market even though it is wholly owned by Cisco, which focuses on the high-end network business.


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