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One Reason Mergers Fail

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MERGERS & ACQUISITIONS
One Reason Mergers Fail: The
Two Cultures Aren’t Compatible
by Michele Gelfand, Sarah Gordon, Chengguang Li, Virginia Choi, and Piotr Prokopowicz
OCTOBER 02, 2018
YONGYUAN DAI/GETTY IMAGES
Amazon’s 2017 acquisition of Whole Foods was met with a lot of fanfare. The deal would allow
Amazon to grow beyond e-commerce and sell groceries in hundreds of stores while collecting
significant shopper data. Meanwhile, Whole Foods could lower its prices (organic avocados for
just $1.69!) and scale up after its recent declines in sales and market share. In the words of Whole
Foods CEO John Mackey, the partnership was “love at first sight.”
A year later, such optimism seems hard to find at Whole Foods. Stories of employees literally
crying on the job over Amazon’s changes have begun circulating. Scorecards measuring
compliance with a new inventory system are used to punish and sometimes terminate workers. A
group of Whole Foods employees have recently taken steps to explore unionizing. Even
customers — the stakeholders that Amazon values the most — have been angry over poorly
stocked stores.
So where did the love go?
Amazon and Whole Foods’ relationship problems were completely predictable. The two
companies may have seen value in capitalizing on each other’s strengths, but they failed to
investigate their cultural compatibility beforehand. They now stand on a fault line where
tensions often erupt in mergers. This fault line is what we call tightness versus looseness. When
tight and loose cultures merge, there is a good chance that they will clash.
Tight company cultures value consistency and routine. They have little tolerance for rebellious
behavior, and use strict rules and processes to uphold cultural traditions. Loose cultures are
much more fluid. They generally eschew rules, encourage new ideas, and value discretion. Tight
cultures have an efficient orderliness and reassuring predictability, but are less adaptable. Loose
cultures tend to be open and creative, but are more disorganized. People in loose cultures prefer
visionary, collaborative leaders: those who advocate for change and empower their workers, like
Whole Foods’ Mackey. People in tight cultures desire leaders who embody independence,
extreme confidence, and top-down decision making. Amazon CEO Jeff Bezos, who is known to
expect unwavering discipline from his workers, personifies this leadership style.
Amazon’s culture is a tight one, characterized by structure and precision. Rooted firmly in the
manufacturing industry, Amazon has defined processes to maximize its efficiency. Employees
operate within a hierarchy and are well aware of the guidelines that dictate their behavior.
According to Amazon’s leadership principles, leaders are instructed to “hire and develop the
best” and “insist on the highest standards.” Performance is subject to constant measurement and
review — employees can anonymously report each other to higher-ups through an internal phone
system. Behavior is even more tightly regulated at Amazon’s warehouses, where target goals and
surveillance keep production on schedule. This rule-bound culture ensures that all employees
understand the company’s objectives and are consistently working to achieve them.
Whole Foods, on the other hand, has a much looser culture. The unique blend of idealism, high
profit margins, and rapid growth that came with operating the first certified organic national
supermarket in the U.S. provided the founders with considerable latitude in introducing
innovative and unorthodox management methods. Prior to the Amazon merger, the company
had an egalitarian structure organized around self-managed teams. This structure granted
individual employees significant decision-making power. Face-to-face interactions between
workers, vendors, and customers were the norm. Managers could operate their stores with
autonomy and tailor products to customer preferences. “Empowerment must be much, much
more than a mere slogan,” Mackey wrote in a 2010 blog post. “It should be within the very DNA
of the organization.” Such decentralization and lack of structure, however, might have ultimately
contributed to company-wide inefficiencies that drove up prices.
To understand more about how mergers between tight and loose cultures work, we collected data
on over 4,500 international mergers from 32 different countries between 1989 and 2013. The
study took into consideration factors such as deal size, monetary stakes, industry, geographic
distance, and cultural compatibility. We found that mergers with more-pronounced tight-loose
divides performed worse overall. On average, the acquiring companies in mergers with tightloose differences saw their return on assets decrease by 0.6 percentage points three years after
the merger, or $200 million in net income per year. Those with especially large cultural
mismatches saw their yearly net income drop by over $600 million.
Fortunately, when diagnosed early, the tight-loose clashes that crop up in mergers can be
handled productively. To increase their chances of achieving cultural harmony, companies
should do a few things.
Prepare to negotiate culture. In addition to negotiating price and other financial terms,
organizations discussing a merger need to negotiate culture. Leaders should start by conducting a
cultural assessment to understand how people, practices, and management reflect tightness or
looseness in both companies. They should determine the pros and cons of their current levels of
tight-loose, as well as the opportunities and threats posed by merging cultures. How might
sacrificing some discretion for structure, or vice versa, enhance or harm each organization?
Above all, they should identify areas for compromise: Tighter organizations need to identify
domains where they can embrace greater looseness, and looser organizations need to think about
how they can welcome some tight features. We call these flexible tightness and structured
looseness, respectively.
Construct a prenup. Once merging organizations better understand the strengths and
weaknesses of their company cultures, they should develop a cultural integration plan that
articulates which domains will be loose and which will be tight. Mutual input about how each
company will change — and a formal contract documenting those changes — can help ensure
long-term success. When Disney bought Pixar in 2006, Disney CEO Robert Iger agreed to a set of
ground rules for safeguarding Pixar’s looser culture. For example, Pixar employees weren’t
required to sign employment contracts with Disney, were free to choose the titles on their
business cards, could decorate their cubicles and offices as they wished, and could continue their
annual paper airplane contest.
Get buy-in. Everyone across both organizations needs to be informed about the integration plan.
Simply explaining what the changes will be is not enough; people need to know why they will be
implemented. Communicating openly and gaining broad acceptance for changes will help
minimize the threat people feel from new ways of doing business. People in tight organizations
might feel their control is being threatened. People in loose organizations might feel their
autonomy is being threatened. Leaders need to be culturally ambidextrous — or demonstrate the
value of being both tight and loose, and work to address employees’ underlying fear of change.
Embrace trial and error. Finally, organizations need to be prepared to reevaluate their original
integration strategy. No matter how foolproof the plan may seem, issues are bound to arise.
Amazon’s increased standardization and employee surveillance at Whole Foods had positive
business outcomes — prices dropped as much as 40% on certain items — but it was also hard on
the company culture. Amazon now has an opportunity to learn from these results, and possibly
incorporate some of the looser cultural elements that Whole Foods employees value. For
example, Amazon could create a better balance between the time people spend on logging
inventory and organizing store shelves and the time they spend interacting with customers.
Likewise, there may be more domains where Whole Foods can relinquish some of its
unstructured business practices. For example, using Amazon’s expertise in data science and
logistics, Whole Foods has an opportunity to gain better customer insights and provide
its clientele with services that are not only personal but also customized and consistent.
Negotiating tight and loose in organizations takes work, but patience and a willingness to make
sacrifices can help merging organizations overcome some of the most difficult challenges. How
will the Amazon–Whole Foods partnership pan out? It’s too soon to say, but spending more time
on integrating their cultures could help.
Michele Gelfand is a Distinguished University Professor at the University of Maryland and the author of Rule
Makers, Rule Breakers: How Tight and Loose Cultures Wire Our World (2018, Scribner).
Sarah Gordon recently nished a research assistant position with Dr. Michele Gelfand and now works in
community development in Lod, Israel.
Chengguang Li is an Assistant Professor of International Business in the Ivey Business School at the University of
Western Ontario.
Virginia Choi is a doctoral student in social and organizational psychology at the University of Maryland, College
Park.
Piotr Prokopowicz is an Assistant Professor at the Jagiellonian University and a postdoctoral associate at
Michele Gelfand’s Culture Lab, where he researches culture and innovation.
This article is about MERGERS & ACQUISITIONS
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SCOTT DAVIS
a day ago
Great article. Useful not only for mergers but also for understanding different leadership styles and conicts
within an organization.
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