Busting four Myths about M&A and Culture Integration in China
Updated: Oct 2, 2018
Translation of Harvard Business Review China Publication, April 2018 issue
BY STEVEN WILLEKENS, ALICE AU AND TONY ZHU
Ample research suggests that many mergers and acquisitions (M&A) fail to deliver on the promised value creation. In our experience, the cause of this underperformance typically is not the insufficient management of the “harder factors,” such as financial valuation or legal and commercial due diligence. Instead, our clients tell us that in making M&A work, the human side is actually the most challenging.
We have the privilege of helping our clients navigate the leadership, team, culture and organizational challenges that come with M&A. We recently worked with a global multinational (MNC) that acquired a Chinese company. At the start of the integration, both parties felt that the cultural differences between them were significant and they feared that integration would be challenging. Based on our previous experience in PMI (post-merger integration), we’ve learned that not addressing these perceived differences can lead to a damaging dynamic:
1. We don’t fully understand each other.
2. We are annoyed by how the other company’s leaders and employees behave.
3. We suspect there might be bad intentions behind their behaviors.
4. We don’t trust them.
5. We don’t want to work with them anymore.
In our work, we try to avoid this dynamic by tackling several myths that can undermine successful culture integration and we would like to dispel a few of the most common ones here.
Myth 1: We have to integrate our cultures.
During the first meeting with the executive teams of the global MNC and the Chinese company, the question was raised: “How do we integrate the cultures of our companies?” Starting with this question is like a plane taking off without checking the weather first. The first question that we suggested to address was: “What level of integration of both organizations and their cultures is required to realize the promised value of the M&A?”
If a global industrial consortium acquires a small tech startup to help it shift toward digitization, probably the worst move it can make is to integrate the cultures. Culture integration is never the goal itself; it’s a means to a strategic end.
Overall, there are three culture integration strategies — integration, assimilation and separation — and all can be valid and effective strategies, depending on the strategic rationale of the acquisition.
· Integration: a new culture is defined that is different from the existing cultures.
· Assimilation: one company adopts the culture of the other.
· Separation: the cultures of both organizations remain separate.
In this particular case, the strategic rationale and planned synergies required strong integration of the operating models and therefore successfully integrating the cultures was important.
Myth 2: The smaller (and/or acquired) company needs to adjust its culture.
Executives of the Chinese company made a joke that spoke to this myth: “We’re sure that we’ll have to adjust our culture. After all, we are the ones that were acquired.” To set the culture integration strategy, it helps to first understand the differences and similarities between both cultures and how well they drive positive outcomes (e.g., achieved targets, engaged employees, satisfied customers, levels of innovation, etc.).
Through our proprietary culture diagnostic tool, explained in our recent Harvard Business Review publication, we gained some interesting insights. While not identical, the cultures of the companies were similar: Both cultures emphasized a certain level of risk avoidance, strong caring about their employees and importance of realizing business results.
We showed leaders from both organizations that if they looked beyond the surface of being Western or Chinese, they would realize that their cultural differences were not significant. Seeing the change in how they viewed themselves and each other was nothing short of amazing.
This opened the door to a discussion about adopting the best aspects of each culture. For example, the Chinese company’s culture excelled at developing strong and cooperative relationships with their clients and they mastered ways to navigate the local business landscape. Just two examples of areas in which the global MNC could improve.
Understanding the unique advantages of both cultures on top of a strong similarity in between the cultures, made them decide not to drastically change or integrate any cultural aspects in the short run, but instead to focus on other priorities, such as integrating the operating models of both companies and developing stronger relationships with each other.
Myth 3: If both companies are of similar size, you should target a culture that is in the middle.
Rather than trying to reach a center point between the two existing cultures (to find consensus), we instead advise to define a new culture that supports the objectives of the integrated organization and that helps to tackle its unique challenges.
As indicated before, in this case culture change wasn’t prioritized in the short run, due to minimum ‘integration risk’ because of cultural similarity. That doesn’t mean however that the similar current cultures are most effective for the newly integrated company.
We asked both executive teams to what extent they felt that their current cultures helped them cope with both external and internal challenges and if they helped them realize their ambitions. They wished to safeguard unique elements of their current cultures (i.e., caring for employees and driving results), while wanting to change elements in order to better connect with the market, become more customer-centric, be more open to and even proactively embrace change, and capture market opportunities through an innovative and entrepreneurial mindset.
In this case our clients used M&A as an opportunity to analyze the effectiveness of both current cultures. And instead of choosing an ‘in the middle’ culture to reach consensus, they challenged themselves to define a new culture that would better enable them to be successful in their unique context.
Myth 4: You can change cultures through posters and road shows
Think about how difficult it is to change our own individual behaviors (Does “I’m going to go to the gym more often and eat less chocolate” ring a bell?). It’s exponentially more challenging to change collective mindsets and behaviors.
Imagine you are an employee at a local Chinese company. After being acquired by a global MNC, you’ve been asked to change your culture — the way in which all of you have collectively thought and behaved for so many years, defining who you are as a company; in essence, your collective identity. Think of which questions that would raise for you:
· WHAT exactly do you want me to change?
· WHY do you want me to change, what are the benefits, what’s in it for us?
· HOW can we change?
We believe that in order to truly inspire real and sustainable culture change, all of the three abovementioned ‘what’, ‘why’ and ‘how’ questions need to be addressed.
In the ‘what’ category, first the current cultures need to be diagnosed. It’s hard to analyze, let alone change, a culture if its current state is unclear. Some practitioners argue that understanding surrounding and influencing factors, such as leadership, processes and organization structure will be sufficient, but we disagree. It’s of critical importance to apply a methodology that draws a picture of the actual culture itself. In our client’s case, our culture diagnostics helped to illustrate that the cultural differences were not significant. This increased the perceived odds of successful integration and it diminished the fear of required substantial change of ‘how we’ve done things around here’ on both sides.
After diagnosing the current cultures, we addressed the ‘why change’ question with groups of employees. Their points of view echoed the executive team’s opinions, where they acknowledged that both cultures struggled with tackling certain external market and internal organizational challenges. At the end they were convinced that some changes of the cultures would be beneficial to the integrated company.
Finally in addressing the ‘how change’ question, it is critical to understand the employees’ perspective. When would the majority of your employees buy in and commit to culture change? They will do so if they believe that it’s real, if:
· ‘we see our leaders showing behaviors that are aligned with the new culture’
· ‘we participated in the culture discussion and shared our point of view’
· ‘we see that culturally aligned behaviors are rewarded’
· ‘we receive support to learn behaviors that align with the new culture’
The bottom line This Acquisition has sufficient remaining challenges to solve. But the organizations made a great start by allowing “both sides” to deeply understand each other, by respecting each other’s organizational personalities, and by driving changes based on business sense and effectiveness, rather than politics and power.
Steven Willekens, at the time of writing, was Director for Spencer Stuart’s Advisory Services in China. His work centered on improving organization health, strengthening organizational culture, building effective executive teams and assessing and developing leaders.
Alice Au is a member of Spencer Stuart’s global board of directors and leads Spencer Stuart’s global Financial Services Practice out of Hong Kong. She also leads the Board and Private Equity practices in Asia Pacific.
Tony Zhu, at the time of writing, was a member of Spencer Stuart’s Advisory Services team. He specializes in large-scale culture transformation projects for companies in China.
 “The leader’s guide to corporate culture.” Groysberg, Lee, Price and Cheng. Harvard Business Review. January/February 2018.