There are two critical factors for a successful merger: cultural and organizational alignment. Mergers and acquisitions facilitate a company’s growth strategy, but one cannot underestimate the challenge of integrating two cultures.
According to a report published by Harvard Business Review, 40 to 80 percent of mergers do not meet the end objectives. This high failure rate is due to multiple factors: business financials, employee capabilities, inept leadership, and company culture. Not only that, according to research conducted by McKinsey and Company, “95% of executives acknowledge that cultural fit is vital for successful integration. However, only 25% cite a lack of cultural alignment as the primary reason for integration failure.”
Culture alignment and integration are essential for successful M&A. The transition from one company to another takes a toll on people; employees undergo a psychological process to adapt and come to terms with their new work situation. The transition from familiar company culture to a new one is often stressful and met with resistance. Even though the change is external, the internal transition profoundly affects people.
What Does Organizational Culture Mean?
Organizational culture can be defined as the outcome of the company’s vision and mission: culture essentially drives a company. It can be seen in the values that guide employee behavior and management practices, working norms, and mindsets that determine how the work gets done in a company.
People, processes, and systems form the backbone of a company. Since these are determined by the company’s vision, mission, and growth goals, it’s unlikely that two separate business entities will be in perfect harmony during a merger. This is the prime issue that many business owners face: they do not focus on how to merge two company cultures following a merger or how to ease the transition phase for the employees.
Identify Differences and Similarities Between the Two Companies
The leaders of the merging companies should learn about the cultures of both companies. They should identify the key differences, as this helps plan where to begin the integration of cultures. This involves understanding how work gets done at both companies, details of management practices, and how the working norms differ for each company.
A few aspects to focus on include:
- How do they make decisions? Who is involved in the decision-making process?
- Are the business operations centralized or decentralized?
- What practices are in place to motivate employees?
- How do they hold people accountable–individually or as teams?
Use a systematic, scientific approach to diagnose culture. Simply relying on the leadership team’s gut instincts is not sufficient to gain a complete understanding of these critical aspects at either company.
One can rely upon a few diagnostics to understand existing organizational trends. The most common approaches are conducting management interviews, employee focus group surveys, and one-on-one interviews. While surveys tend to engage a larger audience, one-on-one interviews offer precise insights into people’s feelings, attitudes, and mindsets. The goal should be to derive as many facts as possible about the existing company culture, accepted behaviors, and priorities to get answers to the following aspects:
- Is there any similarity between the two cultures? If not, list the differences and address each.
- If the differences are significant, will they cause friction?
- What are the opportunities for integrating those differences?
Define the Culture You Want
Knowing what you want as a “north star” can help lead your employees to a common goal.
First, identify the similarities and the differences between the two merging companies to help set the context for future courses of action. The leadership and senior management team have two key responsibilities:
- Determine the cultural gaps and close them, and
- Create a vision of the integrated culture, which goes beyond vision, mission, and defining the value statements.
This is not an easy feat to accomplish. They should begin by identifying specific behaviors they want to teach and then design processes, measures, and incentives to promote those behaviors. The new behavior could be as simple as adopting a unique decision-making style and letting go of previous practices.
Relinquishing old, obsolete patterns is not easy; even more difficult is the task of creating a new culture. This is where workshops and employee training come into play. The leadership team, mid-level management, and employees should collectively determine the new norms, systems, and processes that will help to build a strong foothold for the newly integrated company.
Only when the leaders and people understand the existing cultures can they establish new cultural priorities. These new priorities should be based on two focal points.
- Identify areas where the culture can amplify the value of the M&A deal.
- Find effective ways for companies to manage meaningful differences and build a single, high-performing organization.
Develop a Plan, Measure Progress
Once the company’s leaders have identified rational themes and business initiatives, the next step is to integrate them into the new company culture. This can be done with a structured, step-by-step process:
Step 1: Clearly define an ideal target state of the company you aspire to build.
Step 2: Translate the applicable cultural themes, such as working together instead of silos, ways to ensure fast decision-making, etc.
Step 3: Translate these key themes into modified behaviors for future success; for instance, to promote fast decision-making, it’s necessary to ensure that top management supports it.
Step 4: Set metrics to measure success; for example, if the objective is to assess the sales team’s behavior, the company must create a process wherein customers can share their feedback with those specific people.
To promote the new culture, be prepared to redesign business policies, processes, and governance models to reflect the same cultural aspects. The merger team must also ensure that the right messages and behavior prevail throughout the new company to manage cultural integration properly.
All for One and One for All
A merger provides a unique opportunity to transform the newly formed organization. When organizational culture is in tune with strategic priorities, it facilitates improved performance for years to come.
By establishing a fact-based understanding of the existing company cultures, leaders can set the artistic direction for a high-performing new company.