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.)
Only one third of mergers and acquisitions are clear successes, and as with any type of enterprise change, one common cause of failure in M&A is when skill or capability gaps are overlooked. Accordingly, the learning and development function has a role to play, particularly when it comes to making sure the leaders involved in the change have the right skills sets to lead the kind of major culture change a merger or acquisition entails. At Chief Learning Officer, Potentious CEO Keith Dunbar offers some suggestions for how CLOs can contribute to M&A success:
- Understand acquirer and target collective leadership capabilities. Ideally, during the due diligence phase, the CLO at the acquiring company should look at up to two years of previous leadership assessment data for both his or her company and that of the target. That will provide a representative view of both organizations’ collective leadership capabilities.
- Identify individual leaders with the right M&A leadership skills. Some leaders are better leaders because of how they use their skills. The same thing applies to M&As. Identify leaders in both companies who have the right M&A skills to enable an efficient and effective integration.
- Develop a deal-specific leadership integration plan.With insights gained during the first two steps, CLOs are positioned to do what they do best, enable learning and relationship building. Knowing what the collective leadership capability and individual leader components look like, CLOs can develop specific leadership integration plans that leverage M&A leadership strengths and mitigate risk areas. The types of interventions available to CLOs to mitigate leadership risk areas include leadership engagement workshops, mentoring, executive coaching and leadership development.
An additional key opportunity for CLOs is to increase the transparency of that leadership capability data so that leaders from both organizations can understand their strengths and development areas relative to their peers and teams in the new integrated organization. This not only helps support the effective composition of leadership teams during the acquisition (and beyond) but also enables leaders to better understand when and how they can support, or seek support from, colleagues with different mixes of skills.
One great example of this in practice is Cisco’s leadership model, which builds clouds of leadership capability, rather than trying to optimize individual leaders for all competencies. CEB Corporate Leadership Council members can read our case study on Cisco’s capability clouds here, and can also check out our guidebook for managers leading their teams through the M&A process.
Jet.com, the e-commerce startup Walmart agreed to buy for $3.3 billion this past Monday in a challenge to Amazon, has gotten some good press for its company culture, which CEO Marc Lore has described as centered around such values as transparency and employee ownership. As we know, problems meshing the acquired company’s culture with that of its new parent can be fatal to mergers and acquisitions—a risk too often neglected in these deals—and it’s not hard to imagine some pain in the process of integrating a culturally innovative young company into the definition of a legacy corporation. From a financial perspective, for instance, the Motley Fool’s Jamal Carnette fears that Jet’s startup mentality of maximizing revenue will clash with what he calls Walmart’s “ruthless cost-cutting culture”:
By all accounts, the cultural differences between Wal-Mart and Jet could not be more different. Wal-Mart, an established retailer, is mostly worried about their bottom-line results, paying billions for share buybacks in an attempt to boost their earnings-per-share figures. Jet has continued to act like an aggressive start-up, more concerned with transactions and user growth at the expense of profits. …
[Jet] has been adding 400,000 shoppers monthly and was on pace to sell $1 billion in merchandise annually. However, the company is unprofitable, and its goal of undercutting Amazon’s prices would make it hard to grow margins. Last year, the company abandoned its goal of a $50 subscription fee, much like Amazon’s Prime service, in an attempt to expand its shopper base. It appears Jet has sacrificed profit for growth. Earlier this year, Wal-Mart did the exact opposite, choosing higher profit margins over revenue by closing 269 worldwide stores, many of which were the company’s smaller Walmart Express concept and underperforming stores in Brazil.
On the other hand, this deal was very much about talent, specifically that of Lore himself, who is taking over Walmart’s entire online operation, replacing Neil Ashe as CEO of e-commerce. In fact, Bloomberg reported before the deal went down that its completion hinged on whether Lore agreed to take the job and keep it for several years. At Recode, Jason Del Ray explains how Walmart’s agreement with Lore keeps him committed, and how much money he stands to make if he sees it through:
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“Culture” may be the corporate world’s favorite term to use and abuse, particularly when it comes to M&A. When a merger or an acquisition fails, leaders (rightly or wrongly) are more likely to blame poor cultural fit or the inability to integrate cultures than anything else. Since last year was “the biggest year ever for mergers and acquisitions,” according to the Wall Street Journal, it’s likely that 2016 will witness more leaders citing cultural problems as the source of poor performance in earnings calls. That’s why this article by Daniel Friedman, Chris Barrett and Julie Kilmann at CFO on trying to fix cultural problems during M&A is so well-timed and important to note.
The thrust of the authors’ argument is that culture is critical to M&A success because it drives what is unique and valuable in “how a company gets the job done.” Yet culture is fungible and hard to define, let alone analyze. As a consequence, most companies don’t assess culture as seriously as they evaluate tangible assets during due diligence, resulting in cultural misalignments that explode during the integration phase. The authors recommend doing a “cultural beliefs audit” at the start of integration to uncover and safeguard common values and behaviors, and stay ahead of possible cultural conflicts that will hurt financial performance. This is a good idea and CEB Corporate Leadership Council members can get additional support in performing their own cultural audits here.
What the article doesn’t get into is the fact that culture has been and will continue to be an afterthought for the majority of leaders and deal teams exploring mergers and acquisitions. One can’t blame the authors for not challenging this state of affairs; even though cultural issues are a long-documented problem—at CEB, we’ve been talking about culture and M&A since 2006—there’s been little change on this front in the past decade. By way of explaining that inertia, Friedman, Barrett, and Kilmann quote the hackneyed excuse leaders typically give for integration problems: “Culture trumps strategy.”
What does that even mean? And even if it is true, the phrase should really be “strategy ignores culture,” because what is the value of having a strategy if it’s not designed for your reality?