Culture Strategy Fit

When Culture Eats Strategy

Sat, 10 Feb 2024 00:35:18 GMT

I am excited about my new book which is available from Amazon on February 20th, 2024 . I have included chapter 5 of this book for my LinkedIn community and for all leaders, HR, and OD practitioners. I hope you enjoy it.

In chapter one, I stated that organizational cultures aren’t good or bad, instead, they exist for a reason. The problem is that sometimes things change and the culture that served the company so well in the past starts interfering with its ability to achieve its goals. The story of AVSC and how its risk-averse culture impeded revenue growth is just one of the many examples I’ve encountered over the years. When this happens, the company’s culture is no longer an asset; it is a problem that needs to be solved.

A Disconnect Between Strategy and Culture

The situation AVSC faced was not unusual. Companies, regardless of their industry, location, or size, must adapt their strategies to remain competitive and achieve their goals. The challenge is that no matter how great your company’s strategy is, it will fail unless the culture supports it. If this alignment of culture and strategy is weak or missing, the culture becomes an anchor weighing down the company’s efforts to execute its strategy, creating culture drag.

Diagram 5: Culture-strategy alignment and the effect of culture drag on strategy executionappens, the company’s culture is no longer an asset; it is a problem that needs to be solved.

Diagram 5 illustrates the effect of culture drag on strategy execution. When culture and strategy are aligned, all aspects of the organization work together to support strategy execution. Assuming the strategy is the correct one and is well executed, this alignment of culture and strategy helps the company achieve the outcomes it needs.

When this happens, shareholders are happy, the BOD is happy, market analysts are happy, customers and suppliers are happy, and leaders and employees are happy. Then something significant happens, a triggering event, and we have a problem: the company’s strategy is no longer achieving its financial targets and goals. Performance declines, creating pressure to do something different. When this happens, the company experiences a strategy gap, which is the difference between the current strategy and the strategy the company needs to achieve its goals. If the company does nothing, the strategy gap will continue to erode performance and may eventually threaten the company’s very existence. But let’s say that leaders recognize the threat or opportunity the triggering event presents and initiate a change in strategy that, if executed well, will allow the company to thrive. In so doing, the strategy gap is closed, and all should be well with the world. But hold on, the culture that enabled the old strategy to be successfully executed hasn’t changed; there is a culture gap. The company’s culture has become a barrier the new strategy can’t overcome, resulting in culture drag. Until the culture changes and is aligned with the new strategy, we have a problem.

The existing culture continues to eat the new strategy for breakfast, lunch, and dinner.

The complete book is available from Amazon - Click Here!

Culture Drag at a High-Tech Company

To explain the dynamics of culture drag, it can be helpful to use an example, and AVSC provides an excellent one. As you may recall, for several years, AVSC had successfully executed a go-to-market strategy that was effective because it was aligned with its cautious, risk-averse culture. The company focused its efforts on building its credibility as an innovator, providing leading-edge products to other technology companies. Among other things, it sponsored and hosted highly respected and well-attended think tanks and conferences, its researchers and engineers published countless peer-reviewed articles, and it rapidly grew its catalog of patents. Protecting the value of its intellectual property was of paramount importance, resulting in an extensive volume of legal policies, procedures, and processes. While the company had initiated litigation when necessary, it preferred to avoid the costs and risks this incurred.

But then something happened . . . a triggering event.

The Triggering Event

AVSC had missed its financial targets for three straight years. What happened? Their primary market, North American technology companies, was saturated, and they were struggling to find new customers. This was the triggering event. AVSC was forced to shift its focus to the EMEA and APAC markets. While the sales team had been trying to gain traction in these markets, they had yet to sign deals of any significance. Unless the company quickly remediated the situation, there was a very real risk that external market analysts would switch AVSC from a hold to sell rating. If this happened, investors would likely pull their money out of the company, which would be devastating.

The Strategy Gap

AVSC’s strategy, which had been successful in the North American market, was not working in EMEA or APAC. Specifically, while North American customers preferred to avoid litigation, their counterparts in EMEA and APAC had no such reluctance. In fact, they used litigation and, in some cases, the active involvement of government policymakers as an integral part of their negotiating strategy. This created a strategy gap, which essentially means the current strategy is not yielding the results required to achieve

the organization’s goals.

The New (Future) Strategy

To close the strategy gap, AVSC’s executives decided to use litigation when necessary to increase the pressure on potential customers who engaged in patent infringement. In addition, they decided to actively engage external lobbyists to persuade US officials to intervene on the company’s behalf in EMEA and APAC and advocate for trade policies that would put AVSC in a stronger position in these regions. The executives recognized that the work of the lobbyists was going to take time to yield results and concentrated their energy on litigation.

While there were several customer negotiations in progress, the executives agreed that it was prudent to test the new strategy before implementing it more widely. With this in mind, they selected a high-profile target in South Korea as their test case. The negotiations with this customer had been underway for over two years, in large part due to the customer’s delay tactics and AVSC’s desire to stay out of the courts. In addition to the obvious benefits of closing the deal and increasing revenue, the executives believed that testing the new strategy with this customer would provide insights that could be useful for future and current negotiations in the region. It would also send a message to other customers that negotiations were going to be different. AVSC was not only willing to litigate but would be aggressive in taking patent infringement cases to the courts.

Importantly, it would provide evidence as to whether the new strategy worked. This proof of concept was critical, as the executives felt the need to demonstrate to the financial market and the BOD that they were in control of the situation and AVSC was back on the

road to revenue growth and profitability. Confident they had landed on the right strategy, the executives quickly moved into action. Unfortunately, they didn’t consider the effect the company’s culture would have on strategy execution.

The Current Culture

To recap, AVSC’s culture was described by most executives and employees as risk-averse, cautious, and slow-moving. This was attributed in large part to its legal policies; however, the reality was that it went much deeper. For example, every decision of even moderate consequence required extensive data gathering and analysis. As a result, it was common for decisions to take months and require countless meetings, as well as massive amounts of investigation to answer questions and test every possible scenario. This also bred a fear of getting something wrong or making a mistake, which was evident in the behavior of people at every level. Instead of using their judgment and discretion, employees deferred to their manager, effectively shifting accountability off themselves.

Financial delegation of authority was also set at unusually low levels, which meant that spending decisions involving even moderate amounts of money, such as the purchase of a laptop computer for a new employee, required executive approval. Another example was

the inordinate amount of effort and time spent in preparing presentations. Heaven forbid someone put a semicolon where it shouldn’t be or used differently sized fonts in the titles. These are just a few examples. There were many, many more.

Boom—Culture Drag!

Despite the importance and urgency of the situation and the commitment the executive team made to aggressively pursue new business, the new strategy stalled. It couldn’t break through the barriers created by the company’s risk-averse culture. The culture gap was too big. In a nutshell, although legal supported the litigation strategy, they were not on board with reducing legal oversight. In fact, they doubled down on their current way of doing things, which included scrutinizing every document sent to a customer and actively participating in all customer meetings. Similarly, the executive team itself demanded an exhaustive amount of information regarding the litigation strategy and approach to negotiations, which led to weeks and months of churn. Instead of intentionally making the required changes to the culture to find an effective balance of risk and speed, behaviors didn’t change, and work continued to be done the way it had in the past.

This effectively put the kibosh on efforts to implement the new strategy. This is an important lesson! By not making the changes to behaviors, practices, and the organization system that were required to execute the new strategy, they doomed it to failure.

The complete book is available from Amazon - Click Here!

The New (Future) Culture

For AVSC’s new strategy to succeed, the company needed to be more collaborative, responsive, adaptable, flexible, agile, and risk-tolerant. At the same time, the nature of AVSC’s business meant that it was important to continue to protect the company from harm. This was not an “either/or” situation but rather one of “yes and.” In fact, there were many other aspects of its culture that served the company well and needed to be protected and even leveraged for the company to thrive.

This included the value the company placed on people, which was evident in formal and informal aspects of organizational life. For example, employees had access to best-in-class wellness, flexible work hours, and continuing education programs. AVSC invested heavily in diversity, equity, and inclusion initiatives, which was evident in the demographic makeup of its employees, starting at the executive level. On an informal level, executives made a point of getting to know people personally, embraced an open-door policy, and did a lot of little things like sending handwritten notes to employees on birthdays or when someone did something out of the ordinary. The list went on and on. In return, AVSC’s scores on its annual employee engagement survey were a benchmark for other companies in its industry. Despite the frustrations with slow decision-making and risk avoidance, employees were proud to be members of the company and wanted the opportunity to help it succeed.

Closing the Culture Gap

In an ideal world, every aspect of the way things get done in an organization—its culture—clearly supports the company’s strategy. Of course, changing every facet is hardly realistic. While a broad culture change strategy is needed, tackling everything at once would take a massive investment of resources and years. This was not an option at AVSC, nor is it possible in most organizations. AVSC needed to see immediate results in the EMEA and APAC markets. This was the compelling reason for change. Addressing other manifestations of its slow, risk-averse culture, such as the waste of resources spent preparing PowerPoint presentations and the bottlenecks caused by a lack of financial delegation of authority, was not going to solve the problem. Yes, these issues would need to be addressed if they would help build the momentum needed to change the culture, but this could wait. The priority was to close the culture gap, specifically as it was

manifesting in customer negotiations, and get deals signed.

AVSC opted to use an approach I developed called the CASPE culture change process (CASPE or CASPE process), which is described in detail in the following chapters. In summary, I facilitated three workshops with the executive team over a two-week period that resulted in the identification of a new customer test case and, importantly, clearly identified the changes to behaviors and practices required to drive

speed and agility while at the same time minimizing the risks to the company. This was followed by joint meetings with the sales, business development, and legal teams involved in the test case negotiation, during which they refined the approach and identified obstacles that the executives agreed to address. During these meetings, the joint team, including the executives, agreed to changes to roles and responsibilities, decision-making authorities, communication practices, processes, policies, and procedures. They also discussed and agreed on the behaviors they would do their best to emulate going forward, which included how they would handle conflicts, blaming, and other behaviors that had been evident in the past. Fast-forward six months and AVSC had its first signed deal in EMEA and APAC.

Of course, this is only the first step toward culture change. Over the next three years, AVSC systematically applied the CASPE process in other parts of the business, augmenting this with a broader employee engagement strategy that capitalized on the strengths of its current culture (see chapter twelve).

Lesson #20—Culture change is about finding the right balance.

One of the challenges I observed at AVSC was the tendency of people at all levels, including the executives, to view culture as “either/or.” Either the company could minimize risks or it could be decisive and agile. The reality was that, as the CEO suggested, AVSC needed balance to be successful. It needed to be aggressive while at the same time making smart decisions that would position the company well in future negotiations and litigation. This happens often in most organizations. An entrepreneurial company, like POM, that invests in

Lean Six Sigma or implements a new enterprise resource planning system like SAP is faced with the challenge of maintaining the existing

strengths of its culture while making changes most employees perceive as threatening to it. The result is resistance, as people default to an “either/or” mindset.

When approaching culture change, it is important people understand that you want to protect your existing strengths while at the same time finding a better balance in areas required to support strategy execution. Approaching conversations about the culture and need for change in this way can help to overcome the organization’s cultural defensive routines.

Lesson #21—Triggering events are a catalyst for change.

Broadly speaking, a triggering event refers to something that has happened or is happening that forces a reaction. These can be externally initiated, as with what happened at AVSC, but they can also be internally initiated. Mergers and acquisitions, changes in senior leaders, and the implementation of new enterprise-level technology or core business processes are just a few examples of internal triggering events. A merger or acquisition fits this definition because these are directly tied to a company’s growth strategy versus a direct response to something that has happened in the external environment.

External triggering events refer to things that have happened or are happening that affect the company and are outside the company’s control. These types of events are happening more and more frequently as companies struggle to meet the challenges of our increasingly volatile, unpredictable, complex, and ambiguous (VUCA) world. Consider for a moment the massive external changes that have happened in recent years and continue to happen. Technological advancements are occurring at an increasing rate.

Innovation in fields such as cloud computing, nanotechnology, artificial intelligence, and virtualization are putting pressure on companies to keep pace or risk losing ground to more adventurous competitors. Technological change is also affecting customers’ buying patterns and preferences, as evident from the increase in consumer online purchases at the expense of brick-and-mortar sales. This has also played a major role in the rise of niche companies that use technology to provide a product or service better and faster than their less focused and bigger competitors. Geopolitical conflicts such as the US–China embargo and Russia’s invasion of Ukraine have changed the parameters for doing business in these countries and others. Access to goods and materials, as well as customers, has been blocked or severely impeded, which has had a major negative impact on a significant number of companies.

Another example is the global COVID-19 pandemic that created massive disruption to the global supply chain, driving costs higher across a wide range of industries. Companies in several industries were forced to pivot or reinvent themselves or die. Take, for example, restaurants that, facing closure, changed their business model to offer takeout, home delivery, and even meal preparation packages to consumers. While this change may not last, other companies such as Spotify and Unilever made strategic changes that continue to yield results. As reported by Mauro Guillén in a 2020 Harvard Business Review article, Spotify offered “original content, in the form of podcasts. The platform saw artists and users upload more than 150,000 podcasts in just one month, and it has signed exclusive podcast deals with celebrities and started to curate playlists. The shift in strategy means that Spotify could become more of a tastemaker. At long last, the

company is doubling down on Netflix’s not-so-secret recipe for success in a business in which copyright owners enjoy healthy margins while pure-play streamers struggle to become profitable.” 14

These are just a few examples of the challenges, and occasional opportunities, created by changes in the external environment. Every company, regardless of industry or location, is affected to some extent by one or more of these events and others. It is the ability to recognize or, better yet, anticipate when this is happening and take appropriate action that determines if the organization survives or dies. Fortunately, there are companies that have not only been successful at pivoting and reinventing themselves but taken this to the next level, including Amazon, American Express, Corning, IBM, and Netflix. These companies have made reinvention a part of their culture and, in doing so, have developed a unique capability that gives them an advantage over their competitors.

Unfortunately, there are also lots of well-known stories of companies that failed to do this and are no longer in business, or if they are, they are a faint shadow of their former selves. 15 Blockbuster is a case in point. Multiple articles and case studies have been written over the years citing the company’s demise as the result of its inability to adapt its business model to the threat created by Netflix and on-demand streaming services. “At its peak in 2004, Blockbuster consisted of 9,094 stores and employed approximately 84,300 people.” As of 2023, it operates one store in Bend, Oregon, which is more of a curiosity and tourist destination than a retail operation. Kodak, which continued to bet on its successful photographic film products despite the emergence of digital technology, is another example. BlackBerry, which at one point had eighty-five million users, reportedly failed to innovate and rapidly lost ground to Apple, Samsung, and others. 17 The list is long. In most cases, leaders underestimated or discounted the changes that were happening. The result was a strategy gap that became so great that it was insurmountable.

Now, you may be thinking, Of course they failed. They didn’t understand the changes happening in the marketplace and external environment and adjust their strategy accordingly. What does it have to do with culture? This is a fair question, but as I will explain shortly, a company’s approach to strategic planning and its choice of strategy has a lot to do with culture, if not everything to do with it. That said, while it is rare to find a report about a company’s demise or a significant failure that references culture as a causative factor, there are a few exceptions. The most common occurs in reference to failed mergers and acquisitions such as AT&T’s 2016 acquisition of Time

Warner. 18 In this case, the differences in the cultures of the two companies resulted in a clash that contributed to a significant decline in AT&T’s financial performance. This was despite what appeared to be an ideal marriage of two companies with complementary businesses: Time Warner as a content developer with a valuable inventory of related assets and AT&T as a content distributor with a massive, established customer base. The other exception can be found in reports of companies that have been involved in scandals

or engaged in unethical actions that are usually attributed to the actions of senior leaders.

The Challenger space shuttle and Deepwater Horizon disasters are two of the most famous, but there are many others, including Enron, Barclays, Nortel, and Wells Fargo, the latter of which was described earlier in this book.

The complete book is available from Amazon - Click Here!

Lesson #22—Strategy gaps are linked to culture.

In chapter one, I made the point that culture is systemic in that it is embedded in and affects every aspect of an organization. This includes strategy. The beliefs and values of leaders influence how the company approaches strategic planning as well as its choice of strategy. For example, AVSC’s original strategy was a product of a formal, three-year planning process. This was a comprehensive and rigorous effort that culminated in a three-day off-site meeting of the executive team. The objective of the meeting was to recalibrate the company’s long-term goals and strategy and identify its priorities for the coming year. The meeting was jam-packed and fast-paced, taxing the energy of even the most well-rested executive. The process leading up to the meetings was also rigorous and exhaustive and involved extensive research and preparation completed by the company’s five-member corporate strategy office. The CSO summarized their findings in briefing documents that were sent to the executives well in advance of the meeting. These documents included information on market dynamics, external trends, and other developments that could be a threat or potential growth opportunity for the company. The

executives were expected to read the briefings carefully and use them to advance their thinking so they could make a meaningful contribution to discussions and decision-making. It was an unspoken rule that to arrive at the meeting without being fully prepared would incur the wrath of the executive vice president (EVP) of corporate strategy, and the CEO. This was something everyone wanted to avoid.

After the meeting, the CSO documented the decisions that had been made in the company’s formal strategic plan. When finalized, the strategic plan provided the focus for several of the company’s core business processes, including goal setting, performancemeasurement, resource allocation and management, and compensation.

In the years between strategic planning meetings, the executives reviewed the plan on an annual basis. The principal objectives of the annual meeting were to assess the progress made toward the company’s long-term goals and identify the priorities for the coming year. This also provided the opportunity to discuss emerging trends and developments in the external environment and adjust the long-term goals and strategic plan if needed. The latter only happened on very rare occasions, as any changes had to be approved by the company’s BOD. The BOD had made it clear they would only agree to a change to the company’s goals under exceptional circumstances.

In addition to concerns about a potential negative reaction by the financial market, they believed it was important to hold the executive team accountable, which meant not moving the goalposts. An unintended consequence of the BOD’s position was that the executives were reluctant to make decisions that deviated from the plan. If a new opportunity was identified, it would get tabled until the next annual strategy meeting. This meant the company failed to act on promising new opportunities, especially ones that required a quick response.

For example, the CSO once identified an opportunity to acquire a niche competitor. The team was very excited, as they had been monitoring the company for a few years in the hope that they could make a play to buy it. However, when they brought it to the executive team, they were told that a decision would have to wait until the next annual meeting. By the time this took place, the niche competitor was in the closing stages of an agreement with a competitor and the opportunity was lost. Leaders who support this type of structured, planful approach to strategic planning typically believe it provides the focus, alignment, and accountability required to succeed. To quote Ted Jackson of ClearPoint Strategy, “It’s a beautiful thing when an organization has hundreds, thousands, or even tens of thousands of employees all pulling in the same direction to achieve shared goals. When that happens, there’s virtually no limit to what the business can accomplish.” 19 Leaders who favor this approach believe the extensive research and analysis that accompanies the planning process is essential, as it allows for better decisions and, importantly, mitigates risk. Furthermore, they tend to view the organization as an entity with finite resources. It is incumbent on them, as leaders, to utilize these valuable and scarce resources efficiently and effectively. While there may be occasions when this means making tough choices to not invest in an exciting idea or new opportunity, it is better to focus on a few priorities and successfully complete them than to take on too much and fail to execute. This same thought process applies to opportunities that arise during the year. Allocating resources to a new opportunity requires that people, money, and other scarce resources be taken away from existing priorities. This creates the risk that one or both initiatives will not be completed

or, if they are, not to the standard that is needed.

Contrast this with the strategic planning approach used by the leaders of another high-tech company that I worked with. In this company, a small team led by the EVP of corporate development (CD) constantly monitored the external environment to identify potential threats and opportunities. If something caught a team member’s attention, it was researched and, if it had merit, discussed with the rest of the team. The CD team would decide if the situation or idea should be shelved, monitored, or brought forward for discussion at the executive team’s monthly strategy meetings. These were carefully documented in the belief that even items that didn’t have merit at the time could be potential opportunities in the future. Items to be presented to the executive team were recorded in a “strategy roster” and briefing notes were prepared. The strategy roster was a dynamic, living document the CD team updated on a continual basis.

The CD team felt this was a more effective approach than a formal, multiyear planning process given the speed and extent of change that was happening in the industry. They believed that by the time a three-year plan was developed and executed, the world would have changed, and competitors would have left the company in their dust. The company’s leaders bought into the approach, sharing the belief that it would allow them to take preemptive action to address threats and take advantage of opportunities before their competitors. They also shared the belief that it was better to do something and fail than do nothing at all. They believed failures lead to better ideas and

all it takes is one great idea for the company to achieve a big win. As a result, they frequently approved strategic initiatives that had a slim chance of success. In fact, one of my favorite stories was told by a software engineer at the company—whom we will refer to as Samir.

Samir had been given the go-ahead to experiment with the use of artificial intelligence (AI) in product development. He was given a small budget with the only ask being that he provide progress updates including demos to the engineering team at their regular Friday meetings. The team would evaluate his progress and decide whether there was merit in continuing his work. If the team decided to stop further work, he was expected to comply and share what he learned with other engineers to see if it would help spark an even better idea. He agreed. Everything was going smoothly until one Friday afternoon when the engineering team decided it didn’t make sense to continue with his project. While he was disappointed, he understood and accepted the decision.

A month later, Samir was invited to participate in one of the company’s quarterly innovation labs. The innovation labs were a big deal, as they provided an opportunity for the brightest minds in the company to get together with external thought leaders and talk about the future, share ideas, and experiment. One of the areas discussed was the future of AI and the opportunities it could create for the company. To say he was excited wouldbe an understatement. Even when telling me about this after the fact, Samir could barely contain himself, he was so delighted. He could hardly get his mind around the fact that his failure had opened the door to such an amazing opportunity. While AI had yet to become a strategic priority or initiative, it was on the strategy roster, so when the time was right, the company would be ready to act.

When I say that culture influences and informs strategy, this is what I mean. The way both high-tech companies approached strategic planning and the strategies they adopted can be clearly linked to the beliefs of the company’s leaders. These beliefs shaped the culture, which influenced the strategy. The lesson is twofold. First, if a company doesn’t identify and address a strategy gap, this may be the result of the culture and the beliefs of the company’s leaders. Second, leaders typically do not understand, because they don’t think about it, how their beliefs influence their choices and decisions and thereby influence strategy. These biases are, for most of us, accepted truths that

unconsciously shape our worldview and, therefore, our actions.

T he complete book is available from Amazon - Click Here!

When Culture Is the Problem

Regardless of their approach, not that long ago, many companies could go years, if not decades, without changing their strategy. Even if a significant event happened in the external environment, these companies remained relatively unaffected. Large telecommunications companies like AT&T and Bell Canada are just two examples. However, the world has changed, and stability is now a luxury for most companies. In this new world, it is the companies that respond quickly and effectively to external change that have a significant competitive advantage.

This is why understanding culture drag is so important. It isn’t enough to recognize and take action to close a strategy gap; companies need to also change the culture, and quickly. If they don’t, they risk a disconnect between strategy and culture, resulting in culture drag, which interferes with strategy execution, negatively impacting the company’s performance and its ability to achieve its goals. In this way, the culture that contributed to past success becomes a serious business problem.

The first step in solving any problem is to understand what, precisely, the problem is. The model of culture-strategy alignment (diagram 5) provides a simple yet powerful tool to help leaders do exactly that. By working with the other leaders on your team to complete the model, you can achieve the shared understanding and commitment necessary to determine what changes are needed, if any. One option would be to adjust your strategy so it is consistent with your company’s current culture. Instead of changing the culture, you can focus on how to modify your strategy to take advantage of its strengths. If this is not an option, the only reasonable alternative is to change the culture

to support your strategy, which can be a daunting proposition.

As mentioned in previous chapters, the main reason culture change efforts fail to achieve their goals is because leaders delegate the responsibility to HR instead of actively owning the change effort. This is not because they don’t think it is important, nor is it because they don’t care. In my opinion, this happens because we, the culture experts, have been advocating the wrong approach. As Edgar Schein, a renowned professor at the MIT Sloan School of Management who is widely recognized for his groundbreaking work in the field of organizational culture, so eloquently stated, “Don’t focus on culture because it can be a bottomless pit.”

We can’t change culture by focusing on values, beliefs, and behaviors; we need to focus on the business problem caused by the culture. Values, beliefs, and behaviors are important, but we get to these by solving the business problem and, as part of this, asking, "What will we see people doing when the problem is solved?” By starting with a business problem that can only be solved by changing the culture, culture change is viewed as a critical business priority, elevating it to the same level of importance and urgency as other demands on leaders’ time and attention. However, while leaders have many skills and abilities, culture change is rarely one of them. For leaders to effectively lead culture change, they need a straightforward, results-oriented approach they can trust to deliver the outcomes needed. The approach must leverage the skills leaders already have, thereby giving them the confidence that, with a little help, they have what it takes to succeed.

The good news is that there is a solution, which is the CASPE culture change process. CASPE is a five-step process for solving culture problems that I developed and have successfully used in organizations for the past several years. It was sparked by the insights I gained from working with senior leaders wrestling with complex business problems. It is the culmination of decades spent searching for the answer to one question:

how can we achieve timely, meaningful, and sustainable culture change in organizations?

The complete book is available from Amazon - Click Here!

Dr. Nancie Evans

Dr. Nancie Evans is an author and co-founder and VP Client Solutions at CultureStrategyFit® Inc. specializing in the alignment of organizational culture and strategy. She has developed a unique set of leading-edge diagnostic tools and approaches that provide leaders with deep insights into the culture of their organizations, how it is supporting or getting in the way of strategy execution, as well as the levers that they can use to drive rapid culture change.

CULTURESTRATEGYFIT®

CultureStrategy Fit® Inc. is a leading culture and executive leadership consulting firm conducting groundbreaking work in leveraging culture to drive strategy and performance. Its suite of culture surveys and culture alignment tools are used by market-leading organizations around the world.

Culture Change: Senior Leaders Must Lead The Way

Thu, 01 Apr 2021 01:40:26 GMT

Culture Change: Senior Leaders Must Lead The Way

Culture Change: 30 Years of Lessons Learned

It’s been a long time coming, 11 years and multiple drafts, but I’m excited to announce that my book is finally looking like it is going to be completed. Yay! In my book, I share the many things I’ve learned over 30+ years of searching for the answer to one question: How do we achieve meaningful and sustained culture change in organizations?

This is one of the chapters from the book. I am offering it in the hope it provides some useful insights but also to ask for your feedback. I would sincerely appreciate any thoughts or suggestions you would care to share. Thank you in advance! Onwards….

Lesson 1: Senior Leaders Must Lead The Way

Who is accountable for an organization’s culture? The answer is leaders. By ‘leaders’, I mean anyone at any level who others look to for guidance, especially people who hold senior positions in an organization. The reason is simple — leaders are the single most important factor in determining the success of any culture change effort.

If you rolled your eyes and said ‘duh…everyone knows that’, you’re not alone. After all, if senior leaders are committed to the change effort, they will make it a priority and allocate the resources, required to be successful. Right? The answer is ‘yes and…’

Absolutely, leaders must commit time, people and money if the change effort has any chance of being successful. The thing is they need to go further which means owning it. They must be fully committed to the change and personally involved in a meaningful way in all phases of the change effort. Sure, they are going to need help, but they are going to have to lead the way which means showing — not just telling — others what is expected, making tough decisions and creating the conditions for success. It can’t be a, nice to do, nor can it be delegated to Human Resources or others.

Isn’t Culture a Human Resources Thing?

In almost every organization I’ve worked with, Human Resources are responsible for culture. Leaders might say they own it, but the reality is they typically articulate values and, in some cases, identify the culture the organization needs, communicate this to employees and then hand off the heavy lifting to Human Resources to make the change happen. Unfortunately, this doesn’t work.

Don’t get me wrong. Human Resources plays a critical role in culture change. They own a lot of the processes that encourage and reinforce expected behavior, such as hiring practices, performance management systems, advancement criteria and so on. Leadership and organization development professionals can also provide leaders with expert guidance and support in areas such as behavior change, coaching and feedback and change management. In other words, Human Resources can and should be strategic partners helping leaders with the change effort, but they cannot do it for them.

Why not? Three reasons —- behaviors, practices and environment.

Leaders’ Actions Send Messages to Others

Leaders Reinforce Culture in Day-To-Day Practices

Leaders Create the Conditions for Success (Environment)

Bill's Story

Bill had recently been hired to replace the outgoing CFO who was retiring. He brought to the role 25 years of experience and a proven track record leading several finance organizations in the telecommunications industry. The company he joined was a relatively young organization but growing quickly as it capitalized on new and emerging technology. It was known to be innovative and entrepreneurial with tremendous growth potential.

It wasn’t long before Bill realized that this entrepreneurial spirit included what he described as ‘an allergic reaction to anything resembling discipline, structure or process’. Employees, led by senior leaders, saw these as bureaucratic impeding their ability to be flexible, responsive and take risks; qualities that had played a major part in their success to date. As a result, past efforts made by the Finance team to introduce more discipline in areas such as budgeting, reporting and analysis never got off the ground. Bill experienced this first hand at one of the early meetings he attended with the rest of the executive team.

The executive team was meeting to decide on the coming year’s advertising plan and budget. Several options were on the table for consideration requiring a sizable financial investment. The discussion was animated as executives shared their opinions as to the best way to proceed. This went on for a while with a lot of back and forth as people discussed the merits of the different options. When Bill suggested they consider the results from past advertising campaigns, there was silence. It turns out, there was no data available. Marketing didn’t have any performance metrics and wasn’t tracking results. Executives were making decisions involving millions of expense dollars based on intuition and personal preferences.

The more questions he asked and investigating he did, the more he realized this was the way things were done. Discipline was simply not part of the culture. He saw examples everywhere he looked from day-to-day practices such as meetings and appointments to decisions involving millions of dollars. While the entrepreneurial spirit was great, the lack of discipline was costing the company large sums of money due to rework, redundancies, poor decisions and so on and so forth. This was also contributing to productivity and performance issues, as well as taking people away from doing higher value work. The challenge, as he saw it, was to introduce more discipline without crushing innovation and agility.

The Solution Part 1 – Behaviors and Practices

Recognizing the difficulties in attempting to tackle the issue at the enterprise level, he decided to focus on things within his immediate control and sphere of influence. He started by introducing practices designed to bring more discipline into the way the Finance team worked starting with meetings and appointments. Bill reinforced these practices with his own behavior. For example, he made it clear that people were expected to be on time and prepared when attending meetings, no exceptions and no excuses. To this end, he introduced the following practices and behaviors:

Appointments and One-on-One Meetings

Practices

To schedule an appointment with Bill, people had to explain why the meeting was required and the expected outcome. If his input or a decision was required, relevant background information was to be provided so he could review it prior to the meeting.
Appointment times were strictly adhered to. If someone was more than 5 minutes late, the appointment was automatically cancelled, and the person was forced to reschedule another date. This was a big deal as it was extremely difficult getting time with him. It could be weeks before the next opening in his schedule. People quickly learned to be on time.
Bill’s schedule included time for travel to meetings, unexpected requests, preparation and other events. While there were times when emergencies required a change to his schedule, these were the exception and time was blocked to allow for canceled appointments to be rescheduled at an early date.

Behaviors

Bill was always on time for appointments and he expected the same of others.He read everything provided in advance. If the work provided wasn’t up to his standards, he would send it back and, in some cases, canceled the appointment. Initially, he provided clear written feedback as to what was missing and questions that needed to be answered. This happened once. After that, the person was expected to figure out what was missing and fix it.
At the end of one-on-one meetings, he provided feedback including what was done well and needed to be improved for the next time. For example, he expected people to provide a recommendation with their rationale when asking him for input or a decision. His feedback included coaching to help the person improve the quality of their recommendations.

Meetings

Practices

Meetings started and ended exactly at the scheduled time. If the meeting was to start at 9:00 a.m., he locked the door and started the meeting. People were not allowed to enter the meeting after it started. This included his boss and other senior people. It caused quite a stir at the beginning!
Bill introduced a set of practices aimed at improving the efficiency and effectiveness of meetings. These included publishing the meeting agenda with background information to be reviewed one week ahead of the meeting date. The agenda included the ‘ask’ for each item, such as provide input, identify issues or obstacles, make a decision or provide information. Items that fell into the ‘provide information’ category were reviewed to determine if these could be effectively addressed in other ways and removed from the agenda. The amount of time allowed for each agenda item was determined by the complexity of the topic and the “ask”. In the meeting, these timelines were strictly adhered to albeit with some growing pains at the outset. Initially, agenda items were closed without having achieved the “ask”. As the team got better at using the available time, this became the exception rather than the rule.
He also implemented meeting principles that clearly defined expectations for behavior. These included being present and engaged which meant turning off cell phones and other non-essential devices. To address potential emergencies, he provided a person outside the meeting to contact. These principles were posted on the meeting room wall and used as a form of performance review at the end of each meeting. Specifically, the team quickly did a ‘green, yellow, red’ scorecard of each principle to indicate what they did well and needed to do better. A brief discussion of the ‘do better’ principles clarified expected changes for the next meeting.

Behaviors

Bill always arrived at least 5 minutes early for every meeting. If it was someone else’s meeting, he would wait 10 minutes and if the meeting hadn’t started, he would leave. Initially, this was a problem with his boss and his peers, however, he was able to manage the issue by getting their buy-in and agreeing to return to meetings if required. He made his point swiftly and effectively.
In the first meeting he hosted, one person made the mistake of not taking him seriously and answered a call. Bill stopped the discussion, walked up to the person and held out his hand for the phone. He told the person at the other end to call back when the meeting was over and turned off the phone. He then took the phone and dropped it in the garbage can. Everyone laughed, and the discussion continued. At the break, the phone’s owner approached Bill and apologized asking if he could have his phone back. Bill said no. The rules were clear and there needed to be consequences. If he wanted a phone, he was going to have to get a new one. The story traveled through the building like wildfire.

Within days, people began to show up on time for their appointments with Bill. Within a few weeks, people consistently arrived on time for meetings and not just his meetings but also meetings hosted by his boss and others in the organization. Meetings became more efficient and effective and people appreciated that they could depend on the fact that meetings would always end on time.

This discipline wasn’t restricted to appointments and meetings. He applied the same principles to performance management, written communications, business case preparation, presentations and an assortment of other practices. He used every opportunity to bring greater discipline into day-to-day work and interactions.

Four months after Bill joined the company, employees described a significant, observable culture shift towards increased discipline resulting from the behaviors and practices he role modeled. Although initially limited to the Corporate Finance team, they were already seeing evidence of change elsewhere as other leaders and teams followed his lead.

The Solution Part 2 - Creating the Conditions for Sustained Success

An Interim Solution – Paving the Way for Change

Prior to Bill taking over as CFO, the vast majority of Finance professionals were generalists who reported directly to business unit leaders. Their responsibilities were broad and included budgeting, cost and sales estimates, expense management, reporting and anything else the business unit leader needed. A few specialists reported directly to the CFO handling Corporate level fiduciary requirements, such as Treasury, Investor Relations, Financial Planning and Analysis (FP&A), and Controller/Accounting.

The Finance generalists concentrated their efforts on meeting the needs of the business unit leaders. As a result, every business did things differently. They had their own way of estimating sales and revenue, budgeting, reporting, managing costs, analyzing results and so on. When it came time to pull together financial information at the enterprise level, the Corporate team had a mess on their hands, if they could get the information they needed from the business at all. This led to long delays and inaccurate and incomplete financial information that no one trusted.

Many of the processes required to solve this problem were already in place. The issue was they were not being followed. One option was to mandate that the businesses comply with the Corporate processes, however, this would put the Finance generalists in the difficult position of having to push back on leaders and not deliver what they wanted. This wasn’t realistic given business leaders set the Finance generalists’ objectives, assessed their performance, determined rewards including merit increases, and had a significant say in advancement and development opportunities. Asking the generalists to put Corporate needs ahead of the business and go against the wishes of the business leader was setting them up to fail.

In the short-term, Bill decided to do things that didn’t totally resolve the situation but certainly improved it. The first was to insist on a greater role in setting expectations and evaluating the performance of the Finance generalists. By making this a shared responsibility, he was able to align their objectives with his priorities while at the same time providing an incentive to consider Corporate Finance requirements when they set priorities. Second, he sought agreement from business leaders to comply with the processes most critical to addressing the issues with the timeliness and accuracy of financial information. Given the severity and visibility of the problem, it was relatively easy to get the support he needed. With this in place, he quickly deployed resources to ensure expectations were clear, and the processes and tools understood.

Phase Two – Process Changes

With the immediate problem addressed, Bill directed his attention at making the changes required to achieve his goal of increasing the discipline applied to cost management and decision-making. To this end, he identified and set about implementing a set of initiatives targeted at improving the timeliness, quality and quantity of financial information available to business managers when making decisions. This included launching a major Activity Based Costing (ABC) initiative, adding rigor to the approval process for new hires and capital funding, and spearheading a new business priority and objective setting process. He also partnered with the CIO to lead the implementation of a decision-support system (data and analytics). These initiatives were prioritized and carefully planned so as not to disrupt business-as-usual while ensuring progress was made as quickly as possible.

Recognizing this was not a strength in Finance, or elsewhere, Bill established and staffed a new Project Management Office (PMO). The PMO was responsible for helping the various project teams effectively plan, implement, monitor and report on their progress. Although not entirely successful, due to new hires who clashed with the existing culture, it resulted in a level of consistency and transparency that had been absent from past initiatives.

Phase Three – Structural Changes

Approximately six months after the business leaders agreed to follow the prioritized Finance processes, there continued to be major issues with the timeliness and accuracy of financial information. Despite their assurances, the business leaders had quickly reverted to their old ways of doing things insisting that the Finance generalists make their needs a priority. While most of the generalists did their best to deliver the information required by Corporate, workload pressures and competing demands meant delays and inaccurate and incomplete information was the norm.

The situation came to a head when the company was called to task by outside analysts for overestimating projected revenue and failing to notify the market that expectations were going to be missed. Although painful, this was the opening Bill needed to restructure the Finance function. He immediately moved to change reporting relationships so the generalists reported directly to him and indirectly to the business leaders.

Making this happen was not easy. The business unit leaders fought hard to maintain the status quo. They argued that the current structure allowed them to focus their Finance staff on business priorities, such as pricing, competitive bids and so on. They feared that a centralized structure meant they would lose control of these resources which would cause delays in getting the Financial support required to effectively manage their P&L. In the end, the financial forecasting and reporting issues outweighed their concerns and the CEO supported Bill’s restructuring plan.

Almost overnight, things started to improve. The Finance generalists still had a difficult task as saying no to business leaders is never easy. Knowing their boss, Bill, supported them and would step in to help when needed went a long way to giving them the confidence and courage they needed. Indeed, in the early days, there were several stories of Bill confronting business leaders and C-suite executives who tested the new way of doing things. This only had to happen a few times for the situation to improve but the message was clear. This was the new world order…take it or leave it.

Of course, sustainability ultimately depended on Finance’s ability to deliver timely, accurate financial information that addressed the company’s fiduciary obligations and a need for greater discipline in cost management and decision-making. If the problems persisted after the change, things would have quickly reverted back to the old way of doing things. Fortunately, the changes resulted in an immediate improvement to the quality and accuracy of financial information and only got better as the more complex, longer-term initiatives were implemented.

Two years after he was hired, Bill had achieved his goal of increasing discipline in cost management and decision-making. He also changed the culture. By changing core processes and structures, he created the conditions to encourage and sustain higher levels of discipline not just in Finance but across the company. However, as the business unit leaders had feared, there was also a decrease in the flexibility and responsiveness that was such a valued part of the company’s entrepreneurial culture. This contributed to a level of resentment and disapproval of the changes Bill had introduced, although most leaders acknowledged that it was the right thing to do. This rebalancing or calibration of culture attributes is part of the challenge of changing culture, and a topic for a later chapter.

In Summary

Culture Fit and Performance

Wed, 27 May 2020 12:00:00 GMT

“The culture-environment fit in the case of the higher performing firms was usually reported to be significantly better than in the case of the other companies” Kotter & Heskett (1992: 37)

The idea that organizations perform better than their peers when they have a culture that is aligned to their strategy and appropriate to their industry has a lot of intuitive appeal. After all, it is easy to find examples of organizations with strong and appropriate cultures that are regarded as leaders in their industries. Nordstrom’s, a highly regarded American retailer is rife with stories of employees going above and beyond any reasonable person’s expectations to deliver outstanding customer service [i] . Then there is Westjet, a Canadian airline that has built its brand on the concept that employees are owners and genuinely care about the organization and every customer. Another is Apple, one of the most recognizable and respected companies in the United States; an organization where creativity combined with execution makes it a model for others who are striving to be innovation leaders.

In this article, we examine two factors that have emerged as critical to understanding and getting the most impact from the relationship between culture and performance. The first is the need for culture to fit the strategy and context of the organization. The second is the need to have a culture that is adaptable and able to change in the face of shifting environmental conditions.

Culture Fit to Industry

The idea of culture fit to industry has a solid base of support in organization theory where it has long been acknowledged that the external environment has a significant effect on an organization and, in turn, its culture [ii] . However, this is not a simple cause-effect relationship.

Culture, some have suggested, acts as a mediating or influencing factor that helps an organization develop strategies, structures, processes and so on that are consistent with the assumptions and value systems of its industry and therefore provide it with legitimacy [iii] . At the same time, it is also recognized that organizations within the same industry can have different elements to their cultures so long as they are not in conflict with industry assumptions and values .

Gordon, for example, cites Pepsico and Coca Cola as two organizations in the same industry that have substantially different cultures due to a combination of founder influence, experience with past success, changes in management and other historical contextual events. Both organizations have also been influenced by changes in the industry that have caused them to look to past success to find new ways of working which contributes further to the development of cultural differences [iv] . For the most part, this is conceptual and anecdotal, and while logical, lacked scientific proof… that is until recently.

Industry-Specific Cultural Differences Exist Within Societies

In 2004, Robert House and a group of 172 researchers from 62 cultures released the results of a global study of culture and leadership (the GLOBE Study). One of the hypotheses tested in this study was the assumption that industry sector has a significant effect on organization culture. Culture was measured using the GLOBE organizational cultural practices scale which was the result of an extensive and rigorous design and validation process that built on Hofstede’s culture dimensions [v] . The final data set included 3,859 mid-level managers from 208 organizations within 27 societies and three industries (92 organizations from the finance industry, 73 from the food industry and 43 from the telecommunications industry).

This study is one of the few to provide solid empirical evidence that clarifies the effect of industry context on culture. Specifically, analysis of the data revealed “almost no industry-sector effects on organizational practices across societies ” [vi] (emphasis added). However, when the industry results were compared within societies there was evidence of industry-specific differences. This last finding is consistent with other studies that have examined cultures across industries within a single society. For example, Chatman and Jehn in their study of 15 U.S. organizations representing four industries found that industry membership was significant in explaining cultural differences [vii] . This is the same finding reported by Phillips in her comparative study of six fine art museums and six wineries located in the state of California [viii] .

Industry Norms Operate as a Constraint on Change

Given that industry influences the culture of member organizations, understanding industry-specific cultural characteristics can provide valuable contextual information when trying to understand an organization’s culture and assess its potential for change. Specifically, if we think of industry norms as a form of control, it is likely that these are going to act as a constraint on culture change if the intended change conflicts with these deeply established and widely accepted norms [ix] . The reason for this is simple.

Industry-specific assumptions and norms develop from the basic requirements of the market which are influenced by competitive dynamics, customer and societal expectations. If an organization fails to act in a manner that is consistent with these expectations, even when the expectations change, it will face a serious threat to its survival.

An example of this can be seen when regulated industries such as telecommunications and energy have been opened to competition. In these cases, long-standing belief systems such as universal access to products and services are suddenly subject to change and with this many of the assumptions, values and norms that have defined the way that the organization goes about its work. For example, deregulation of long-distance telecommunications in the 1980’s forced organizations to shift from a mindset of universal access and reasonable profit to one that emphasized differentiated services and markets based on profitability [x]. The old norms and values that emphasized slow decision-making, a focus on compliance and life-long employment no longer fit the new competitive reality and, very slowly, began to change [xi].

Conformity versus Differentiation?

The popular tendency to want to compare the culture of one’s organization to others in the same industry only reinforces conformity versus differentiation.

While private sector organizations are subject to a form of social control that accompanies industry membership, they are also competing with other participants in their industries, as well as new entrants from other industries. In a competitive environment, success is associated with the ability to differentiate one’s organization from one’s peers. As such, it has been argued that culture is only a source of competitive advantage when it is valuable, rare and imperfectly imitable” [xii] .

If organizations conform to industry-specific cultural characteristics and norms that they share with their competitors, how can their culture be a source of differentiation? If, as Chatman and Jehn argue, there is a great deal of cultural homogeneity within industries then perhaps it is other factors, such as technology or products, and not culture that results in a sustained competitive advantage [xiii] . Furthermore, does this not suggest that the popular tendency to want to compare the culture of one’s organization to others in the same industry only reinforces conformity versus differentiation?

Arguably, there appears to be substantially greater value in comparing the culture of one’s organization to that of others in different industries and even sectors that are pursuing the same or a similar strategic focus such as innovation or providing an outstanding customer experience. It also appears to support the argument that culture fit as it relates to performance is more relevant when examined in the context of factors other than industry such as fit to strategy.

Answer #1 – Culture Fit to Strategy

The crux of the culture fit to strategy perspective is that organizations that have a culture that is in alignment with their strategic context and competitive dynamics in the marketplace outperform those that don’t. In other words, if an organization has a culture that supports innovation in an environment where this provides a competitive advantage, it will outperform those with cultures that are not as innovative.

Apple provides a prime example of this in action. For a long time, Apple continuously reinvented the computing industry with its string of game changing products such as the iPad tablet computer. This, and many other examples of Apple’s impact, has led Fast Company to write, “Apple’s dominance as a manufacturer suggests that its merest whim can make waves in the rest of the computing industry” [xiv] . Obviously, they have a strategy that is very effective in their industry but there are a lot of organizations that have great strategies that they are unable to execute. The difference, at least in part, is that Apple’s culture is hard-wired for innovation.

The same argument can be made for organizations that have a customer-focused culture in environments where providing an exceptional customer experience leads to a competitive advantage. Disney, the Four Seasons Hotels, and Emirates Airlines are prime examples of this type of culture. There are also those that have quality-oriented cultures in environments where success is defined by the ability to produce products that are more dependable or reliable than their competition. This is one of the pillars of Toyota’s rise to eminence and the reason why its product recalls sent shockwaves around the world. Walmart, it could be argued, has developed a culture that is focused on operational efficiency in order to win in a competitive market where price and value is the name of the game.

The bottom-line is that these organizations have a clear strategy that fits their competitive environment and to which their culture is aligned. However, no matter how appealing this argument, the question remains as to what evidence there is that this is indeed true; that organizations whose culture fits their strategy outperform those that don’t.

Culture Fit to Strategy Impacts Performance

Kotter and Heskett tested the culture strategy fit relationship using a subset of organizations selected from their original 207. They were able to identify a group of twelve outstanding performers and ten good but lesser performing organizations that were rated as having relatively strong cultures which made them useful for studying what, if anything, there is about their cultures that made a difference in terms of performance.

To answer this question, they did a document search seeking information about each company’s culture. They then interviewed 75 industry analysts who closely followed one or more of the companies and asked them about the culture of each company as well as whether they believed the culture influenced its performance.

They discovered a consistent trend showing that the organizations whose culture better fit its context and “especially the competitive situation in its key markets” substantially outperformed those with a weaker fit of the culture to strategy or the strategy to its business context. In addition, they were also able to show that every single one of the lower performing organizations had previously had a good culture-environment fit that eroded in large part due to environmental changes that they had not been able to adjust to.

Answer #2 – Adaptability

“…with much success, that strong culture can easily become arrogant, inwardly focused, politicized, and bureaucratic. In an increasingly competitive and rapidly changing world, that kind of culture unquestionably undermines economic performance” Kotter & Heskett (1992: 24).

Perhaps the most interesting discovery Kotter and Heskett made was in determining that the twelve outstanding performers had also faced significant changes in their environments however these organizations, unlike their lower performing peers, were able to adapt even though they too had strong cultures [xv] .

This is consistent with the view held by detractors of the culture fit perspective. These people suggest that culture fit works for the short-term but is a detriment for the long-term. This is because strong cultures create inertia that stops firms from adapting to changing conditions.

Some members of the financial community even suggest that there is an inverse relationship between strong cultures and long-term performance. They argue that a strong culture gets in the way of the organization’s ability to adapt to changing external conditions which negatively impacts financial performance [xvi] . They do this by stifling the flexibility and adaptability required to stay in step with external and internal developments (such as a change in the method of business) [xvii] . Simply put, cultural change is too slow to prevent substantial deterioration of economic performance especially in volatile and dynamics environments. Economic events had to threaten the very existence of the organization for managers to seriously question the culture. In response, proponents of culture fit believe that culture change can be managed in a way that allows the organization to adapt to changing conditions. This begins with making learning and adaptability part of the organization’s culture [xviii] .

The Case for Adaptive Cultures

As far back as 1968 (and likely earlier) academics were writing about the increasing rate of change and complexity, often related to technology, and the need for organizations and societies to be able learn and adapt if they are to survive [xix] . Specifically, they urged leaders to create organizations that were in reality ‘learning systems’ – organizations capable of transforming themselves while avoiding intolerable disruption.

A learning system… must be one in which dynamic conservatism operates at such a level and in such a way as to permit change of state without intolerable threat to the essential functions the system fulfils for the self. Our systems need to maintain their identity, and their ability to support the self-identity of those who belong to them, but they must at the same time be capable of transforming themselves. [xx]

These insights lay the groundwork for the emergence of the learning organization and organizational learning movement that took off in the 1990’s with the publication of Peter Senge’s book, The Fifth Discipline [xxi] . Senge and many others ^[xxii] provide models and prescriptions aimed at helping leaders to transform the culture of their organizations into one where learning, adapting and generating new knowledge is embedded in the belief systems and values of the organization and its members. The objective, these theorists suggest, is to create an “organization that facilitates the learning of all its members and continually transforms itself” ^[xxiii] .

This thinking is echoed in the strategic management literature (specifically the resource-based view of the firm) where organizations are urged to develop ‘dynamic capabilities’ or the “ability to integrate, build and reconfigure internal and external competencies to address rapidly changing environments” [xxiv] . The underlying argument is that organizations are no longer operating within stable and predictable environments where a structured way of managing and working is effective in producing the desired outcomes. Instead, the pace of change in the external environment is increasing and with it the complexity and unpredictability of the challenges and opportunities that organizations are facing. In this turbulent environment, organizations need to be able move swiftly to identify and take advantage of emerging opportunities and challenges in the external environment while continuing to exploit their existing markets [xxv] . The means to achieve this is, they suggest, in the ability to develop and effectively use organizational routines specifically related to the coordination and integration of work, learning and reconfiguration/ transformation [xxvi] .

Similar to the learning organization, a number of suggestions are provided to make dynamic capabilities a reality. Interestingly, while there are some specific differences, the two perspectives are fundamentally similar in that they emphasize transforming the organization into an ideal form that emphasizes adaptive and generative learning. Of course, this makes complete sense when one considers that they have a shared objective of helping organizations to survive and thrive in the face of constant and often unpredictable external change. Specifically, they share the belief that organizations can be designed to effectively react to, anticipate and even facilitate change leading to a competitive advantage in the marketplace and/or long-term sustainability.

The Challenge

While this is intellectually and intuitively appealing, the challenge of making it a reality is very much another thing as many leaders have discovered [xxvii] . For organizations that are faced with a threat to their very existence and/or the need to implement rapid and major change, transforming into a learning organization can appear to be an unrealistic, Pollyanna-like aspiration. For starters, organizations don’t have the luxury of taking years to implement a change that is perceived by many managers to be far removed from current business realities.

A similar argument can also be made with respect to the development of dynamic capabilities. This is not to say that the characteristics and capabilities recommended by these experts aren’t worth aspiring to or pursuing. The challenge is that most leaders are caught up in the realities of performing day-to-day operations and delivering financial results.

What organizations need is the ability to effectively and efficiently overcome the ‘dynamic conservatism’ that holds us back from reaping the benefits of changes we make to our way of doing business, our structures, processes, technology and so on. To accomplish this requires that we can quickly make fundamental changes to the assumptions and beliefs that guide the way people think, act and make decisions. In other words, we need to be able to accelerate the rate of culture change which is something that many renown experts have argued is impossible [xxviii] . In addition, we need to be able to do this in a planned and intentional manner that is aligned with our strategy and/or solves a business problem or need. At the same time, it must protect the existing, complementary strengths of the current culture and its subcultures as these often provide an important source of identity as well as diverse capabilities.

Seeking the solution to these challenges has been the focus of my research and practice for the past thirty years and counting. The quest to help leaders intentionally design and create adaptive cultures that support an organization’s strategy and/or solve a business problem. This includes accelerating culture change so that it occurs in a matter of months achieving sufficient progress to overcome the challenges caused by dynamic conservatism.

[i] See for example Chatman & Cha (2003)

[ii] This is based in the open-systems perspective of organization put forward by Katz and Kahn in their influential 1966 article.

[iii] Abernathy & Chua (1996); DiMaggio & Powell (1983); Meyer & Rowan (1991); Abrahamson & Fombrun (1994)

[iv] Gordon (1991)

[v] Information on the development of the GLOBE organizational cultural practices scale is provided in Chapter 8 of Culture, Leadership and Organizations: The GLOBE Study of 62 Societies by Robert House and his associates (Hanges & Dickson, 2004)

[vi] Brodbeck, Hanges, Dickson, Gupta & Dorfman (2004: 664)

[vii] Chatman & Jehn (1994)

[viii] Phillips (1994)

[ix] Gordon (1991)
[x] Tunstall (1985)

[xi] Pennings & Gresov (1986)

[xii] Barney (1986)

[xiii] Chatman & Jehn (1994)

[xiv] Eaton (2011)

[xv] Kotter & Heskett (1992: 37-40)

[xvi] Kotter & Heskett (1992)

[xvii] Sorensen, 2002; Tushman & O’Reilly, 1997

[xviii] Gordon & DiTomaso (1992)

[xix] Hutchins (1970)

[xx] Schӧn (1973: 57)

[xxi] Senge (1990)

[xxii] Easterby-Smith, Burgoyne & Araujo (1999); Pedler, Boydell, & Burgoyne (1991); Nevis, DeBella & Gould (1995)

[xxiii] Pedler, Boydell & Burgoyne (1991)

[xxiv] Teece, Pisano & Shuen (1997)

[xxv] There is an extensive body of literature on the subject of dynamic capabilities and the importance of ambidexterity and resilience for organizational survival. Most of it can be traced to the influential writing of James G. March (1991) and his paper titled ‘Exploration and exploitation in organizations’. More recent articles that have built on his original argument and framework include: Simsek, Heavey, Veiga & Souder (2009); O’Reilly, Harreld & Tushman (2009); Simsek (2009); Raisch & Birkinshaw (2008); Wang & Li (2008); Uotila, Maula, Keil & Zahra (2009); Harreld, O’Reilly & Tushman (2007); Gupta, Smith, & Shalley (2006); He & Wong (2004); Gibson & Birkinshaw (2004); Zollo & Winter (2002); Eisenhardt & Martin (2000)

[xxvi] Teece, Pisano & Shuen (1997); Zollo & Winter (2002); Nelson & Winter (1982)

[xxvii] Grieves (2008); Finger & Brand (1999); Weick & Westley (1996); Salaman & Butler (1994)

[xxviii] Best known for his insights and perspective on culture, Edgar Schein (1999)

Acquisition Integration Strategies Part 1

Tue, 03 Dec 2019 14:14:00 GMT

This blog is a chapter from my doctoral dissertation which was published in 2002. My research studied the integration of two firms involved in a joint-venture buyout, specifically Sprint Corporation’s buyout of the PCS business from its cable partners. It is important to note that PCS had operated as an independent company with no active involvement by Sprint in its day-to-day operations. I was particularly interested in the effects of integration on knowledge transfer and creation between the two firms. This chapter is part of my literature review on integration strategies explored from a knowledge-centric perspective. I am sharing it in this blog as, while the references are old, the content remains relevant to this day.

As an interesting side note, my research provided significant insights into organizational culture and specifically its importance as part of acquisition due diligence and integration. This was unexpected and became the foundation for my work over the last 30 years.

To make this blog more readable, I have removed specific references within the text. I’ve also split the chapter into two parts. The first provides a knowledge-centric perspective on the value of integration and an introduction to key concepts related to strategic and tactical integration. Part 2 focuses on the factors influencing tactical integration and design considerations.

Introduction

This chapter begins with a knowledge-based argument in support of acquisitions. This segues into a discussion of the role of organizational integration strategies in terms of their significance to the achievement of acquisition goals. The second part tackles the definitional task and explores ‘organizational integration strategies’ from three different perspectives. The first is the rationale behind the acquisition decision, which sets the integration agenda by establishing objectives and goals that are aligned to the underlying strategic purpose. The second examines the strategic level of integration, which defines the umbrella strategy for integration efforts. The third moves to the tactical level and specifically explores the four areas of tactical integration and the factors that influence tactical integration design decisions. Note: The latter is covered in Part 2.

A Knowledge-Centric Perspective on the Value of Integration
“…global competitiveness is largely a function of the firm’s pace, efficiency and extent of knowledge accumulation” (Hamel. 1991: 83).

A firm’s unique knowledge is a fundamental source of above normal returns and profitability and thus competitive advantage. The reason for this is simple, changes in the economies of advanced cultures, specifically in terms of the liberalization of markets (dropping of trade barriers) and the expansion of markets into intermediate products where markets previously did not exist (such as in index futures, portfolio insurance etc.) has resulted in new competitive dynamics. These new dynamics place a premium on the value of non-tradable assets as explained by Teece (1998: 60) in the following quote…
“…competitive advantage at the level of the firm can flow only from the ownership and successful deployment of non-tradable assets. If the assets or its services are traded or tradable in a market or markets, the assets in question can be accessed by all; so, the domains in which competitive advantage can be built narrows as markets expand.”

One such difficult to trade asset is knowledge, and more specifically ‘know-how’. As Teece (2000: 36) explains there is an “absence of commodity-like markets for knowledge assets, a condition that arises in part from the nature of knowledge itself and, in particular, the difficult to articulate and codify tacit dimension”. Although there is a strong argument for the exploitation of existing knowledge bases (replication of the new approaches in diverse contexts and their absorption into the existing set of routines for the execution of that particular task) combined with internal innovation and knowledge renewal by means of the transfer or sharing of best practices within the firm, this is by no means an easy task. As a result, organizations, particularly in the West, are looking to augment their internal knowledge base through other means such as cooperative ventures and acquisitions which, given the increasing pace and scale of change in the external environment, can provide attractive alternatives to the onerous and time-consuming challenge of ensuring the continual renewal of in-house capabilities. They can, as noted by Vermeulen and Barkema (2001: 458), provide an opportunity to “broaden the firm’s knowledge base, break inertia and foster the development of new knowledge through combinations of existing forms of knowledge”.

The main premise is that over time organizations tend to become rigid and narrow in focus owing to the repeated use of their knowledge bases. Thus, an organization’s unique competencies, once a source of competitive advantage, are now ‘competency traps’ that are blocking signals from the external environment that indicate change is necessary. Under these conditions, when the organization’s internal stock of knowledge is deteriorating, acquisitions can “revitalize a firm and enhance its ability to react adequately to changing circumstances” (Vermeulen & Barkema, 2001: 458) because they allow the firm to acquire new technological resources and to adopt practices and skills in new domains. In addition, acquisitions can promote constructive conflict, which acts as a shock to the system, breaking rigidities and inertia, stimulating renewal and change and enhancing the ability to adapt to new circumstances.

However, it is also widely accepted that most mergers, acquisitions and the like, at least by financial measures, fail to achieve their goals as illustrated by the following statements…

One of the main reasons for these sub-optimal results is believed to be the lack of planning and effective implementation of organizational integration strategies. This is supported, these and other theorists suggest, by a solid body of evidence that when a structured integration process is well managed, significant results can be achieved such as faster integration that capitalizes on targeted synergies, lower costs, protection of productivity and customer focus, and higher levels of employee morale. In other words, all value creation takes place after the acquisition. The challenge, however, is to accomplish this in the face of pressure for rapid realization of the synergies expected from the combined firm as explained in the following excerpt from Galpin and Herndon (2000: 5-6)…

“Given the all-out race for globalization, not to mention the constant short-term pressure for earnings growth, desirable targets are fewer in number, demand for them is much greater, and price premiums are far more common. There is less margin for error in actually achieving the economic projections of the deal. Costs must still be driven out of the business, but now without any sacrifice of the ability to capture revenue-generating synergies. Moreover, in contrast to the 1980s (an era when an acquisition normally could be integrated over a longer period, perhaps two or three years), today the businesses must be merged as quickly as possible – often within six to twelve months after the close…It is no longer sufficient just to buy the right company at the right price. Today’s deals start there, but they also demand effective execution of the right integration plan.”

To summarize, not only is it important to select the right integration strategies; these must be executed quickly and effectively so that the combined organization achieves rapid positive gains from its acquisition effort. The speed of integration is also important in minimizing the effects of diverting management attention and effort away from the achievement of other strategically important goals. This raises a number of concerns relevant to the transfer of knowledge between firms such as…

This is just a short list, but I presume that you’re getting the picture. The risks of any acquisition are extremely high which makes the selection and implementation of the right integration strategies absolutely crucial not only in terms of achieving short-term performance goals but also in terms of the transfer of knowledge which is as previously noted one of the main reasons for an acquisition in the first place. But exactly what are integration strategies and what are the ‘right’ ones?

Integration Strategies

It is perhaps interesting to note that the term ‘integration strategies’ is used to describe the outcome of decisions at a number of points in the acquisition process. For example, integration strategies can refer to the type of acquisition (integrating product lines in a product extension acquisition), the degree of autonomy provided to the acquired firm or the specific tactics used to integrate the two organizations. This article focuses on the tactical level and on three specific types of integration activities. The strategic level of integration is covered briefly in order to position the ensuing discussion of tactical integration.

Strategic Integration

At a macro or strategic level, acquiring organizations are faced with making decisions regarding the degree of autonomy retained by the acquired company and the degree of strategic interdependence between the acquired and acquiring firms whereby strategic interdependence reflects the “degree of capability transfer, mutual learning and adaptation necessary to accomplish the aims of the acquisition” (Hakanson, 1995). These dimensions provide the axes of Haspeslagh and Jemison’s (1991) four-quadrant model, which several later frameworks have adapted or built upon.

According to this model, acquiring organizations select an integration approach that aligns with the strategic goals of the acquisition. This is important as different approaches influence how the firms will be combined, as well as the selection of tactical integration activities and related organizational and human resource policies and procedures. For example, in product extensions the retention of the related knowledge and capabilities of the acquired firm is crucial to achieving acquisition goals. This is consistent with a high degree of strategic interdependence. However, one of the challenges presented by high strategic interdependence is that it is often associated with an emphasis on rapid integration in the pursuit of capability and knowledge transfer. This in turn may have unwanted and unanticipated negative consequences such as the loss of valued capabilities in the acquired firm either through the loss of individuals with specialized knowledge, or as a result of changes to the acquired company’s culture that here to for had preserved certain valued capabilities. Hence, in this type of context-dependent situation, a high degree of autonomy may be necessary in order to ensure that there is minimal deterioration of the acquired firm’s stock of knowledge.

Situations that require high autonomy and high strategic interdependence are often the focus of a ‘preservation strategy’, which places priority on preserving the acquired firms’ unique capabilities. This is because the best way to ensure that there is minimal or no loss of capability in the acquired firm is to leave it alone including allowing it to maintain its unique culture and other internal environmental conditions that support these capabilities. However, as reported in Hakanson’s (1995) study of the acquisition of R&D labs by Swedish multinational corporations, although highly prized functional areas were given a certain degree of autonomy, others less central may be subject to full assimilation or absorption by the acquiring firm.

This introduces another reality of the strategic level of integration, which is that although the valued areas of the acquired business may follow one of the four primary integration strategies (absorption, holding, preservation, symbiosis), in actuality integration activities at the departmental or functional level can fall anywhere on a continuum from fully autonomous to fully integrated. As well, even though certain areas of the business may be protected from direct integration activities they are still likely to be affected by organization-wide changes in other areas of the business as well as wide-ranging initiatives such as culture change programs. For example, the rationalization of sales and marketing may cause problems in the protected areas such as cutting members of research and development off from established information channels.

There are basically two factors that determine the degree of integration within different parts of the acquired firm: the strategic importance of the function in question (centrality) and the ease with which the integration can be achieved.

“As a general rule, functions that are critical to the strategy of the firm and that are relatively easy to integrate should be consolidated; functions less important to the combined firm’s strategy and harder to integrate should be coordinated rather than consolidated: and finally, functions that are peripheral to the firm’s overall strategy and are hard to integrate should be left separate” (Buono & Bowditch, 1989): 73).

As such, support functions such as Legal, Finance and Human Resources are often subject to an absorption integration strategy, even when core areas of the business are being ‘preserved’ (ibid). This is because they are not central to the organization’s strategy, and they are relatively easy to integrate. They are also a potential source of operational synergies that can result in substantial cost savings to be achieved through economies of scale and the elimination of redundancies.

One of the challenges posed by the absorption strategy is that its success is closely related to the extent that the ‘acquired’ and ‘acquiring’ organizations are culturally compatible. If the organizational cultures are significantly different then absorption is likely to be extremely difficult as it will be associated with the destruction of values and unique organizational characteristics often resulting in behaviors that include active hostility and even mass resignations. In contrast, if the organizational cultures are similar, the absorption can go quite quickly and smoothly.

Summary

To summarize, the dominant decision criteria in the design of a strategic integration strategy is the underlying purpose or intent of the acquisition. The result is the selection of one of four primary integration strategies (absorption, holding, preservation, symbiosis) however, in most acquisition situations, pressures for rapid financial results often cause a combination strategy to be implemented whereby high value areas of the business are protected and provided a high degree of autonomy in order to minimize the risk of capability loss while others that are not seen to provide unique capabilities or value are targeted for assimilation in order to achieve cost savings.

In the case of my research, all three of the business units that participated in this study were targeted for absorption by the acquiring firm due primarily to the desire to quickly achieve cost savings through the elimination of duplicate functions, consolidation and streamlining of work processes and the leveraging of economies of scale. In other words, the acquiring firm did not believe that these three areas of the business provided any value-added unique capability or knowledge that needed to be preserved. Now that this research has been positioned within an absorption approach at the strategic integration level, we are ready to examine the literature pertaining to tactical integration strategies.

Tactical Integration

So, the decision has been made to assimilate the three business units in the acquired company and leave the core areas of the business intact. But what’s the best way to accomplish this and how will this affect the transfer of knowledge between the two firms?

Unlike strategic integration strategies, tactical integration strategies deal with the ‘nuts and bolts’ of the integration process in terms of precisely how the desired level of integration is to be achieved. It involves changes to one or both organizations that are often radical such as the closing of a laboratory or plant facility, or the termination of employment relationships even in the most senior positions. As such, the design and implementation of a tactical integration plan can be viewed as a form of managed strategic change intended to “secure the efficient and effective direction of organizational activities and resources toward the accomplishment of some set of common organizational goals” (Pablo, 1994: 804).

The problem is that the implemented strategies do not always work as planned primarily because the organizational realities within which managers operate are complex, dynamic and difficult to predict. The challenge therefore is for managers to assess the situation to the best of their abilities, based on a number of factors, and then select the tactical integration strategies that are most appropriate to achieving acquisition goals while at the same time recognizing that the realized strategy is emergent in that the final result is likely to deviate somewhat from original intentions. Ideally, this should involve participation by senior managers from both the acquired and acquiring organizations for, as Larsson and Finkelstein (1999: 16) note, “the greater the degree of interaction and coordination between combining firms, the greater the degree of synergy realization” .

To be continued in part 2…

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Acquisition Integration Strategies Part 2

Tue, 03 Dec 2019 08:18:00 GMT

Part 1 of this blog presented a knowledge-based argument in support of acquisitions and discussed the role of integration strategies in terms of their significance to the achievement of acquisition goals. It also examined ‘organizational integration strategies’ from three different perspectives. The first is the rationale behind the acquisition decision, which sets the integration agenda by establishing objectives and goals that are aligned to the underlying strategic purpose. The second examined the strategic level of integration, which defines the umbrella strategy for integration efforts. The third introduced tactical integration. Part 2 picks up where we left off and explores the four areas of tactical integration and the factors that influence tactical integration design decisions.

Factors that Influence Tactical Integration Decisions

As one might expect, there is a wide range of factors that can potentially influence the design and effectiveness of tactical integration efforts. Due to the scope of this study and the fact that access was restricted to three support departments in the acquired firm, four factors are of interest: differences in organizational culture, differences in management style, the relatedness of the business, and the relative size of the firms.

Differences in Organizational Culture

The main premise with respect to differences in organizational culture, is that the greater the cultural fit between the combining organizations, the easier the integration and the greater the likelihood that acquisition goals will be achieved. Likewise, organizations that tolerate and even promote internal cultural diversity are more likely to allow an acquired firm to retain its own values, beliefs and practices than organizations that use culture as a control mechanism that emphasizes conformity and adherence to a unique organizational ideology. In other words, a high tolerance towards cultural differences translates into low or moderate levels of integration, which is consistent with the preservation and symbiosis approaches. On the other hand, an acquiring firm with a low tolerance is likely to employ several control mechanisms to establish its own culture in the acquired firm thereby raising the potential for conflict especially between top management teams.

Differences in Management Style

Arguably differences in management style is a subset of organizational culture, however I have chosen to treat it separately as it is an area that has received a great deal of attention in the acquisition literature. As with most assessments of the influence of culture on acquisition performance, differences in management style tend to be examined using Hofstede’s (1997) six dimensions of organizational culture resulting in the identification of a number of behavior-oriented predispositions such as risk orientation, decision-making approach, and preferred control and communication system.

This has led to the recognition that management style tends to vary greatly across organizations. For example, policies and practices that appear reckless and extremely risky to one management group may be justifiable approaches in another. Similarly, one management group may have a completely different tolerance for change and ambiguity than another. There are also differences in orientation towards decision-making in that while one management group may rely primarily on intuition and experience another may require formal management science techniques, such as strategic plans and market research. Differences in orientation towards control and communication can also be significant in that while one management group may prefer loose controls and open channels of communication, another may prefer greater operating control, highly structured channels of communication and adherence to well-defined job descriptions. Similarly, one group may prefer a high involvement, consultative approach to decision-making while others lean towards centralized decision-making and formal authority.

The main argument is that “while similarities in management styles facilitates organizational assimilation, major differences in management style and philosophies can prove to be serious impediments to the achievement of acquisition success” (Datta, 1991: 291. Specifically, acquisitions of firms with different management styles can result in integration challenges such as interpersonal conflicts, difficulties in achieving operational synergies, market share shrinkage and poor performance. This is aggravated by the fact that most acquisitions are accompanied by significant changes in a compressed time frame which creates high levels of apprehension among acquired firm management who often react defensively by clinging to their own beliefs and approaches in an attempt to reduce uncertainty and preserve their identity. The outcome is likely to be one of conflicts and confrontations contributing to poor acquisition performance.

The extent to which differences in management style affects organizational performance is likely to vary depending on the level of interaction required amongst the two management groups in the organizational management of the combined entity. As such, the potential for conflict due to style differences is likely to be the highest in acquisitions followed by considerable integration. In addition, the cooperation required to manage the integration process might be very difficult to obtain if there are major style differences. Because the integration of operations makes the coexistence of two different styles virtually infeasible, it inevitably raises the issue of whose style will dominate (generally it is the style of the acquiring firm that prevails). When this occurs, it is frequently accompanied by the voluntary resignation of members of the acquired firm including key executives and thus the loss of potentially valuable knowledge.

Relatedness

Relatedness has also been referred to as the ‘combination potential’ of the acquiring and acquired firms. The popular belief is that the more similar the strategies and operations of the combining firms, the more likely that integration efforts will be effective and acquisition targets will be achieved. There is, however, recent evidence that suggests that this may not be the case, as high relatedness often coincides with a lot of overlap in operations, which leads to streamlining efforts and potentially the termination of the employment of members of the acquired firm. The result is a high degree of employee resistance to integration efforts, which puts the acquisition’s performance at risk. Hence, it is suggested that a better scenario is one where the organizations have complementary strategies and operations, which results in ‘economies of fitness’ (Larsson & Finkelstein, 1999: 6).

This is because complementarities can present opportunities that enhance the competitive position of the combined entity by boosting synergy realization. However, the combined theory and evidence suggests that the differences between the organizations involved are only beneficial if they are not so large that they prevent synergies, learning and the creation of value. Hence, it is important for organizations to include an assessment of the degree of similarity between the two organizations in order to determine the likelihood of resistance, the opportunities for synergies, and the potential for achieving synergies that will lead to acquisition success. Too much similarity limits opportunities for operational synergies and presents a threat to members of the acquired firm that will result in significant resistance to integration efforts. On the other hand, a high degree of complementarities presents a challenge, as it may be difficult for managers of the acquiring firm to identify the full range of synergy opportunities, especially if the organizations are large and complex.

Relative Size of the Two Firms

The relative size of the two organizations is a factor but not as might be expected in terms of a difference in the basis of power. According to some theorists, it is an indicator of management attention, and to others it is an indicator of synergy potential related to critical mass.

According to the management attention argument, if there is a large size difference in that the acquired firm is small relative to the acquirer, the firm is often left alone because it does not attract a lot of attention from the acquiring company’s management. As a result, the human needs of small acquired firms tend to get overlooked or trivialized leading to alienation and discontent.

On the other hand, if the acquired firm is relatively large, it represents a higher potential gain or loss, which results in greater attention. In comparison, the critical mass argument basically states that “bigger acquisitions do better because they offer greater synergy potential, not because managers pay more attention to the integration process when targets are large” (Larsson & Finkelstein, 1999). Whatever the specific reason, larger acquisitions are more likely to be subject to integration efforts in order to achieve acquisition goals. However, as noted previously, the larger the acquisition, the more difficult it will be for managers of the acquiring firm to identify the potential opportunities and risks associated with integration.

Four Elements of Tactical Integration

Once these factors have been taken into consideration, the next step is to determine the appropriate course of action to achieve the objectives of integration. If interpreted from a change management perspective, integration activities focus on the four major components of organizations: the work or tasks performed by the organization (task integration); the people who perform the tasks (people integration); formal organizational arrangements that are aimed at coordinating the work of the organization (structural integration); and organizational culture (cultural integration).

These four components constantly interact as part of the daily functioning of the organization and, as such, changes to one component affect the other components often leading to reciprocal changes in the search for congruence, which is the degree to which the needs, demands, goals, objectives or structures of one component are consistent and complementary to the same aspects of other components. Hence, the design of a tactical integration plan must take into account all four components as well as the connections between them.

Task Integration

The primary focus of task integration is on changes to the work activities that produce an organizations products or services. It is normally associated with the absorption strategy in that it involves the elimination, re-allocation and/or redistribution of work, predominantly within the acquired firm, in order to reduce costs. In most cases, this involves significant changes in the nature of the work being performed with corresponding shifts in associated roles and responsibilities.

Although, it is possible for the changes to affect both organizations, members of the acquired firm usually feel the primary impact. In Hakanson’s (1995) study of the merger and acquisition of research and development (R&D) laboratories, he noted that in a number of cases task integration involved a shift in focus from innovative work to more mundane adaptation and improvement of existing products based on the technology of the acquiring firm. Likewise, Galpin and Herndon (2000) provide the example of the elimination of work associated with the development of internal policies within the acquired company primarily because the acquiring firm takes over the management of these types of activities. In other words, the acquiring firm sets the work agenda including determining, to a large extent, which projects are cancelled or redirected in order to meet acquisition goals.

These types of changes can result in a requirement for different skills and knowledge that can be addressed by the termination of the affected resources and hiring of new employees with the required capabilities or through retraining initiatives if supported by time and financial resources. However, even in cases where a skills gap does not exist, changes of this type are likely to be met by strong resistance due to the ambiguity and related stress of the situation. The risk, of course, is that affected individuals will choose to leave the organization taking with them potentially valuable and specialized knowledge.

Structural Integration

The focus of structural integration activities is on changes to one or both organization’s formal arrangements such as the structures, systems, processes, methods and procedures that are explicitly developed to get individuals to perform tasks consistent with the combined organization’s strategy. As in the case of task integration, structural integration activities tend to be most commonplace within absorption approaches whereby efforts to achieve acquisition benefits and efficiencies focus on the removal of overlapping positions and the consolidation of structural hierarchies. This is especially prevalent within support organizations and other internal groups that are not seen as providing additional value to the acquiring firms.

Structural changes often involve shifts in reporting relationships and lines of authority that require the acquired firm to conform to the structural arrangements in the acquiring firm. This can lead to confusion particularly regarding the ground rules of acceptable behavior within the new entity that can result in conflicts and even unethical behavior that interfere with integration efforts and is detrimental to acquisition performance.

Changes in formal structural arrangements can also involve significant shifts in business processes even within protected areas of the acquired business as illustrated by Cisco Systems insistence that acquired firms conform to their quality manufacturing process within the first six months of integration and GE Capital’s focus on systems integration including shared e-mail and intranet. These types of changes can, however, also lead to confusion and inefficiency as members of the acquired firm struggle to address ‘downstream’ problems and to figure out ‘what to do’ and ‘how to do it’. This is especially prevalent where the ‘how to’s’ are left to the discretion of local management leading to the development of multiple approaches and fragmentation.

One process area that is frequently targeted for integration when absorption is the goal, and especially when it is accompanied by a desire to culturally assimilate the acquired firm, is reward and evaluation systems. This is because these are widely viewed to be influential in reinforcing a desired organization culture in that they define what is important and how success is measured and rewarded. For this reason, changes that affect an organization’s system of bonuses and incentives often create huge negative reactions, even if the differences are relatively minor. For example, managers that are used to highly leveraged bonuses, which are common in entrepreneurial firms are likely to have difficulty accepting a more traditional or bureaucratic model. Even speculations on how the system is going to be affected can lead to anxiety and negative reactions that impede integration and are detrimental to the performance of the acquisition.

Another aspect of structural integration focuses on decision-making particularly as it pertains to integration decisions. At several points in this paper, I have noted that top managers within the acquiring firms are expected to manage, or at least provide a plan as to how they are going to manage the combined entity. As a result, integration decision-making is often centralized with all significant decisions made by members of the senior management team of the acquiring firm, primarily because they are held accountable for acquisition performance and are compensated accordingly. The result is that, in many cases, the acquiring firm’s systems, processes, procedures, structures and so on are imposed on the acquired firm however, whereas a system may have been appropriate in the acquiring firm, it may be detrimental to the functioning of the acquired firm. Jemison and Sitkin (1986) explain the dysfunctional imposition of an acquiring firm’s formal structural arrangement as an outcome of either defensiveness or arrogance. The former is a result of a lack of familiarity with the acquired firm’s business and processes, whereas the latter stems from an erroneous belief that the acquiring firm’s systems, including evaluation criteria and rewards, is superior and should therefore be adopted uniformly after the acquisition.

An explanation for both behaviors may be provided by Grant (1996: 119) who suggests that the quality of decisions depends upon their being based upon relevant knowledge such that “decisions based upon tacit and idiosyncratic knowledge are decentralized while decisions requiring statistical knowledge are centralized”. If the knowledge relevant to a particular decision can be concentrated at a single point in the organization, then centralized decision-making is feasible however in an acquisition, we are dealing with complex, context-dependent knowledge comprised of tacit and explicit knowledge, which cannot be aggregated and analyzed in statistical form. This suggests that the common practice of centralizing decision-making such that all major decisions are made by members of the acquiring company’s senior management team is ineffective as there is no way that they can possibly have access to the full range of required knowledge.

In essence, all of these examples of types of formal structural arrangements constitute a means of coordination and control in organizations and, as such, related changes tend to conform to the routines currently in place within the acquiring firm. However, for acquired company personnel, standardization of procedures typically carries “strong symbolic meaning, signifying their subordination to a new and alien organization” (Hakanson, 1995: 135). Therefore, although it is tempting for an acquiring organization to assert its own management systems, especially if they believe them to be superior in terms of control and/or performance, this should be undertaken with extreme care as “changes in established practices and work routines tend to be resisted and can easily cause severe obstacles to integration” (ibid: 135).

Cultural Integration

Cultural integration is concerned with differences between the cultures of the participating organization, including management styles, with an emphasis on acculturation or the extent that the acquired firm is expected to conform to the culture of its acquirer. It includes all elements of the informal organization such as the behaviors and mental models of senior managers, social relationships, the political climate, and communications patterns.

As already discussed, an acquiring organization’s orientation towards cultural diversity or a single unified entity will determine the extent to which culture change initiatives are part of its integration plans. However, the feasibility of any cultural integration strategy is constrained by the values and attitudes in the acquired organization and specifically the propensity of individuals to accept the change and conform to the culture of the buyer, which is referred to as acculturation. As such, the degree to which members of an acquired firm want to preserve their identity and culture and the extent to which they are attracted to the acquiring firm appear to influence both the process and the outcome of the cultural change. This has led to the proposition, supported by research reported by Navahandi and Malekzadeh (1988), that for cultural integration to be effective, both firms need to agree on the mode of acculturation that is to be used. If this does not occur, the result can be significant levels of acculturative stress, which is defined as “…individual states and behaviors that are mildly pathological and disruptive…” leading to resistance to integration efforts (ibid: 84).

Acculturation occurs through four primary modes: deculturation, separation, assimilation and integration. These tend to correspond to the degree to which the firms are related and their tolerance towards multiple internal cultures and subcultures. Deculturation tends to occur in situations where the two firms are unrelated and there is a low tolerance for multiple cultures. Typically, the acquired firm loses faith in its own culture but is unprepared to accept the culture of the acquiring firm. This results in high confusion and anxiety accompanied by a loss of identity and feelings of alienation.

Separation also occurs most often in unrelated acquisitions but in this case, there is a greater tolerance for multiple cultures. As a result, the acquired firm attempts to preserve its culture and practices by remaining separate and independent of the acquiring firm resulting in minimal cultural exchange between the two organizations.

By contrast, integration or cultural pluralism is an option when the acquiring and acquired firms are related, the acquired firm wishes to maintain its own culture and identity and the acquiring firm has a high tolerance for multiple cultures. As a result, there is some degree of change in both organizations’ culture and practices concurrent with the retention of elements of each. Ideally, this accompanies symbiotic integration as it presupposes that both organizations attach a high positive value to interaction and that such interaction is not seen to be a threat to cultural autonomy. Unfortunately, this is rarely the case in acquisitions.

The fourth mode is assimilation, which is a one-sided process where the acquired organization is willing or forced to adapt totally to the culture of the acquiring firm. This can occur when the acquired organization is favorably disposed to the buyer and holds its own company in low regard, thus seeing its culture as an obstacle to performance. However, assimilation can also occur in situations where the acquiring firm has a low tolerance for multiple cultures and sees the acquired firm has highly attractive (and related). Unfortunately, in this type of situation, conflicts can arise as the acquired firm may not wish to be assimilated and chooses to resist efforts in this direction. However, even if both organizations agree to an assimilation mode of acculturation, the decision to pursue this course of action must be taken with care as low tolerance towards cultural diversity has been shown to negatively affect earnings expectations. To show intolerance for the acquired company’s culture is to threaten the cooperation and commitment of the senior managers who may be instrumental in determining the success of integration efforts.

When cultural assimilation is a desired objective of tactical integration plans, the next decision is to design an appropriate course of action. According to Hakanson (1995) this should include three areas of focus. The first is to foster formal and informal face-to-face interactions between members of both firms to create contact networks based on mutual trust and credibility. The second is to as quickly as possible integrate the communications infrastructures of the two organizations to promote the development of a common dialect as well as the dissemination and sharing of information. The third is actually more of a caution that pertains to task and structural integration activities as it highlights the potential for resistance resulting from standardization of procedures, as previously discussed. Other authors suggest a variety of approaches that loosely fit into these areas such as cultural awareness workshops, upward feedback forums, changes to assessment and feedback processes and incentives and so on.

People Integration

I have left people integration to the last as its primary emphasis is on minimizing employee resistance which is a risk associated with all three of the previous integration areas. In general, members of acquired organizations tend to react negatively towards acquisitions thereby making integration efforts difficult and negatively affecting acquisition performance. These reactions tend to range from active resistance in the form of voluntary exits, verbal discontent, and sabotage, to passive resistance such as increased absenteeism, low productivity, and disobedience. But what causes this negative reaction?

The answers are just as broad ranging as the behaviors they engender. For example, an early study by Handy (1969) reported that ninety percent of nearly one thousand senior and middle executives he studied were psychologically unprepared for the changes in status and organizational structure they would encounter following their company’s acquisition. Seeing and sensing the anxiety in senior managers, lower level employees grow anxious about the combination, how it will be managed and their personal fate in it resulting in resistance to integration efforts and lost productivity.

Another example is provided by Marks and Mirvis (2001: 87) who, reporting on the AOL-Netscape acquisition that occurred in the late 1990’s, describe how integration efforts were slowed by Netscape’s self-perceptions of technical superiority; “the people who believed they had invented the Internet were dismayed at combining with a firm they considered the McDonald’s of the Internet”. They suggest that an attitude of superiority frequently carries over into assumptions that the buying company’s business acumen – and policies, procedures, people and systems – are superior to those of the purchased firm thereby contributing to condescending attitudes about the other side. When this is combined with pressures to quickly integrate the acquired firm plus incentives for short-term results versus how smooth the transition goes, managers in the acquiring firm often unilaterally dominate the action and impose their own integration plans resulting in high levels of resistance within the acquired firm. The result is usually high turnover especially among key executives from the acquired firm and with this the loss of valuable expertise.

As well, Larsson and Finkelstein (1999) noted that the more similar the operational and strategic elements of the combining organizations are, the greater the employee resistance. This they suggest makes sense given that similar operations are likely to provide more opportunities for the elimination of work, jobs and people. In contrast, organizations with complementary operations are likely to be seen as less threatening but are still effective for realizing combination synergies. In addition, other studies have illustrated how acquisitions negatively affect career mobility, opportunities for advancement and career development by forcing layoffs, relocation and loss of individual influence. Still others, have found that a lack of attention, in general, to people-affecting integration issues can lead to resentment and resistance.

The actual tactics engaged to minimize resistance tend to concentrate on four categories of interventions or change activities: communications, senior management leadership, informal and formal relationship building, and personal transition coaching and counseling. In the context of an acquisition, communications tend to be effective when it delivers timely and relevant information using a variety of channels, but which emphasizes frequent face-to-face interactions. This is similar to senior management leadership, which emphasizes visibility and continuity as determinants of integration effectiveness. Basically, it is believed that integration tends to be more effective when there is high visibility and long-term continuity both in acquisition related leadership roles, as well as within the senior management team of the acquired firm. Visibility is important as it relates directly to the active involvement of senior managers in the change effort thereby giving it credibility and momentum. Likewise, continuity of the acquired firm’s top management team reduces employee concerns regarding the potential impact of the change and ensures that valuable knowledge stays in the organization.

Meanwhile, continuity of the integration leadership team ensures that momentum is maintained. For example, Hitt and his associates (1998) found that nine out of ten unsuccessful acquisitions that they studied experienced senior management turnover leading to confusion and resistance among lower level employees.

As for relationship building, the apparent rule of thumb is the more, the better. There are numerous ways of fostering formal and informal relationship building opportunities. Formal activities tend to emphasize the movement of people between the two organizations achieved through the rotation of personnel, or secondment of people between firms. It can also include formal gatherings of people such as international team meetings, which provide opportunities for people to get to know one another and establish cross-organizational contacts and networks. Informal activities focus on social gatherings such as the Eka Nobel ‘Whisky and Sauna’ meeting described by Birkinshaw and his associates (2000) as a way that senior R&D managers could get to know one another and the head of the organization could get to know them on an informal basis. Finally, several interventions focus on assisting employees in dealing with the anxieties and stresses resulting from a major change such as an acquisition. These personal transition interventions often include a wide range of activities such as counseling sessions, change and cultural awareness seminars, workshops, one-on-one coaching and so on.

There are, also, some general findings that are interesting with respect to managing people integration. The first is that people integration is extremely difficult and takes a very long time to accomplish. For example, Birkinshaw and his associates (2000) noted that after six or seven years only one of three acquisitions in their study appeared to be fully integrated and this single company, despite all three having significant prior acquisition experience, was the only one that apparently did a good job of people integration. The second is to not overemphasize employee satisfaction as they suggest that an “excessive concern with employee satisfaction may be misplaced” (ibid: 417) as even though people integration was incomplete the acquisitions still achieved the desired operational synergies and financial results. Furthermore, there appeared to be a ‘zone of indifference’ within which people were willing to stay with the firm even though there was a certain degree of dissatisfaction present. Finally, there appeared to be support for the premise that a certain amount of tension and conflict creates a positive rivalry between firms that can result in superior performance. The third and final guideline is more general in that they found the human integration process appears to facilitate the effectiveness of task integration. Specifically, “if the task integration process is pursued before human integration has begun, there is a high likelihood of acquisition problems, because the individuals on each side do not know one another, and because there is a high level of suspicion about the motive’s of the acquirer’s management” (ibid: 419).

Summary

The tactical integration of combining firms is a complex, difficult and time-consuming endeavour requiring a pluralistic approach that addresses all four categories of integration activities as well as the connections between them. As such, it requires a significant investment in resources to be effective, however the benefits that can be realized are believed to far outweigh the costs associated with the failure that is likely if integration is not addressed adequately. However, even when the decision is made to invest in integration practices difficulties will likely be encountered that have the potential to impede progress and negatively affect performance.

Certainly, the most prevalent concern is employee resistance, which is a potential risk of integration activities in all four areas. If you change the work that is to be done, people are threatened, and the result is resistance. If you impose the acquiring firm’s processes, systems, structures and so on, you create resistance. If you try and assimilate cultures, there will be resistance and, if you make changes that cause people’s skills and knowledge to no longer be valued, there will be resistance. Hence, a great deal of attention is given to managing resistance as a central aspect of integration efforts at the tactical level.

There are, however, other potential problems that must be considered such as knowledge gaps that are too great to be easily bridged leading to few synergies between the organizations, too much similarity in the knowledge structures of the firms such that little new knowledge is acquired, or the imposition of dysfunctional processes resulting in knowledge loss and degradation of performance, and there are many, many more.

References for Acquisition Integration Strategies Part 1 & 2

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Blake, R.R. & Mouton, J.S. (1985) ‘How to achieve integration on the human side of the merger’, Organizational Dynamics, 13, 41-56.

Conner, D.R. (1993) Managing at the Speed of Change, New York: Villard.

Datta, D.K. (1991) ‘Organizational fit and acquisition performance: Effects of post-acquisition integration’, Strategic Management Journal, 12, 281-297.

Diven, D.L. (1984) ‘Organizational planning: Neglected factor in mergers and acquisition strategy’, Managerial Planning, July-August 1984, 4-12.

Doz, Y. (1996) ‘The evolution of cooperation in strategic alliances: Initial conditions or learning processes?’ Strategic Management Journal, 17, 55-83.

Edmondson, A. & Moingeon, B. (1996) ‘When to learn how and when to learn why: Appropriate organizational learning processes as a source of competitive advantage. In B. Moingeon & A. Edmondson (Eds.) Organizational Learning and Competitive Advantage, London: Sage, 1996, 17-37.