Integrating Disparate Cultures Can Be a Major Obstacle in Mergers and Acquisitions

Integrating Disparate Cultures Can Be a Major Obstacle in Mergers and Acquisitions

Whole Foods Under Amazon is a fascinating recent case study (conducted by Harvard Business School professors Dennis Campbell and Tatiana Sandino and co-written with James Barnett and Christine Snively) which considers the cultural challenges inherent in the acquisition the e-commerce giant agreed with the high-end supermarket chain last year. Historically, the two companies had very different approaches to business, the authors tell Michael Blanding at HBS Working Knowledge, with Amazon focused on driving costs down through data-driven supply chain efficiency and Whole Foods’ decentralized model, in contrast, allowing for a distinctive personal touch from store to store, which in turn justified a higher price point. In the case study, based on secondhand reports in the media of how the acquisition is working out, Campbell and Sandino speculate on how culture clash could be making the integration of these companies more challenging:

The question that Campbell and Sandino ask in their case is: Given the pressures Amazon was facing to turn around Whole Foods’ slide, should they have approached the acquisition differently? While there are no easy answers, Campbell says that part of the issue is realizing the limits of standardization, even for a company that has perfected data-driven management.

“It’s not totally clear that data will be a perfect substitute for human judgment,” he says. “That might work in a digital platform, where you have tons of data on customer history you can use to drive a recommendation engine, but in a store environment, there is a lot of learning that takes place from employees interacting with customers that can be very localized and specific.”

Whole Foods is still in its early days as an Amazon property, so it’s too soon to say with any certainty how prepared Amazon was for this culture conflict and how well they are handling it, especially without having an inside view of the acquisition. However, we do know from our research at CEB, now Gartner, that culture fit is a huge concern for CEOs when thinking about mergers and acquisitions and discussing the topic with investors. Our research shows that 20 percent of the time, when CEOs bring up culture on earnings calls, they are doing so in the context of M&A. CEOs leading through M&A are increasingly under pressure to provide details on how they are integrating two distinct cultures to satisfy investors’ concerns. (CEB Corporate Leadership Council Members can learn more in our Inside View on Discussing Corporate Culture with the Street.)

Frequently, a merger or large acquisition is an opportunity to assess or redefine the culture you have, sometimes pulling the best aspects from each combining entity, or sometimes defining a completely new path. We looked at several such cases while developing our Ignition Guide to Identifying the Culture That Supports Your Organization’s Strategy (available to Corporate Leadership Council members here), we spoke to several members who identified a merger or acquisition as the ideal time to use these guidelines to define the culture for the new organization.

First, HR leaders should work with senior executives to evaluate how different cultural attributes would support specific strategic initiatives. Leaders should pay specific attention to the possible drawbacks of certain aspects of culture; every culture sounds good in theory, so the downsides are seldom obvious and need to be deliberately drawn out. For example, Whole Foods’ local and semi-autonomous culture might serve loyal customers well, but won’t work as well if Amazon’s strategic goal is rapid global growth, in which case that culture will need to change.

The second key activity we recommend is actually working with employees to pilot the proposed culture and getting feedback on the hidden effects. We know from our members that the cultural vision of senior leaders (especially those unfamiliar with the acquired company) is very different from how a culture manifests itself on the ground. We encourage HR to work with employees to identify the obstacles to implementing the desired culture and the tensions that culture may create in their day-to-day work.

Looking again at the example of Amazon and Whole Foods, if Amazon is having trouble implementing culture integration as the Harvard study suggests, it might be because leaders did not get enough input from Whole Foods employees before embarking on the change agenda, or did not factor that input sufficiently into their decision-making. From those employees, they might have learned beforehand that a stricter inventory management strategy would cause stress for employees who weren’t used to working that way, which in turn could invite some morale issues and negative press. Even if more aggressive inventory management was still part of the culture they wanted to implement, talking to employees ahead of time may have allowed them to put programs in place to ease the transition and anticipate these headwinds.