(Seventh in a Series on Culture)
I saw a report from well-known industry analyst recently that said essentially this. “The primary cause of the (“ABC/XYZ”) merger failure was cultural incompatibility. XYZ, the TargetCo, historically focused on quality first and price second. For ABC, the BuyerCo, everything they have always done was just the opposite and their insistence on extreme cost leadership destroyed XYZ’s business.”
Welcome to the “chicken vs. egg” debate regarding which comes first, culture or business model. I wasn’t involved in that particular deal (thankfully), but I’m willing to bet the scrambled outcome described by the analyst had a whole lot less to do with culture and a whole lot more to do with business model. Most acquirers make similar mistakes and are often downright confused about the differences.
"Culture may eat strategy for breakfast, but if you're not careful, business model will eat culture's lunch."
First let me emphasize our viewpoint that getting culture right during mergers and acquisitions is, in fact, an extremely important success criterion. As we have documented throughout this series on culture, this topic is still one of the most challenging of all M&A integration competencies. Findings from our recently completed survey, the State of M&A Integration Effectiveness 2014, ranked culture #3 in response to the question, “What are the greatest remaining obstacles or challenges, if any, your company must overcome to be more consistently successful with integration?"
But if culture is still an enigma to acquirers, business model is hardly on the radar screen at all. Therein lurks substantial risk and a fundamental reason why culture is so often blamed for integration disasters when it likely played only a supporting role.
Business model can be defined as the ecosystem for how an organization creates, delivers and captures value. There are several outstanding business model frameworks to evaluate, three of which are highlighted below. As illustrated in Business Model Considerations in M&A, components included in a business model framework include things like your principal strategic or go-to-market discipline (for example cost, innovation or customer responsiveness); customer value proposition relative to other brands or competitors; essential value-added activities, processes or capabilities; channels; customer segments; revenue model; cost structure; and many other key elements that determine how you implement your specific strategy and make money on a day-to-day basis.
In light of these fundamental building blocks, business model is highlighted in the top level of our “Cultural Iceberg” Model. Our viewpoint is that these strategic components more typically drive the development or evolution of cultural attributes rather than the other way around. I love that old saying that “culture eats strategy for breakfast.” I believe that insight is entirely true, but my corollary is, “culture may eat strategy for breakfast, but if you’re not careful, business model will eat culture’s lunch.”
By the way, this isn’t an “either/or” debate. The two are highly correlated and integrally intertwined. You can’t arbitrarily change one without anticipating impact on the other. Both are essential, and both must be aligned around our True North of Culture principle, which should be applied whether we are considering business model components or cultural attributes of the acquired business. What counts is what preserves, creates and leverages value best, not what we do vs. what they do.
To further explore this topic, let’s illustrate business model considerations in a hypothetical M&A deal. What if Wal-Mart bought Neiman Marcus; or what if Dunkin’ Donuts bought Starbucks? Now if you are with one of these outstanding companies, please accept my sincere apologies for these purely hypothetical and whimsical illustrations. Let’s chalk it up to professional development for the M&A community and try to play along. Pick one of the combinations listed above and compare/contrast each of the following components between buyer and target.
Primary market discipline or customer value proposition?
How might Wal-Mart’s cost leadership discipline influence other cultural attributes throughout Wal-Mart? What might happen if these attributes or business model elements were arbitrarily integrated into Neiman Marcus? What is the expected ambiance and customer experience at Starbucks? How might these business model components influence other cultural attributes at Starbucks? What if Dunkin’ attempted to convert its acquired Starbucks stores to Dunkin’s format?
Essential value-added activities, processes and capabilities?
How might Wal-Mart’s views about merchandising and pricing strategy represent a potential risk to Neiman Marcus? How might Wal-Mart’s supply chain and distribution process help or hurt Neiman’s value proposition? How might Starbucks’ baristas view Dunkin’s well-intentioned efforts to harmonize its HR policies and practices into Dunkin’s business model and culture? How well might cross-training or job rotation between Starbucks and Dunkin’ store-level associates work as a cost optimization synergy between these two?
You get the point, so let’s move on to the final question. How and when should business model be considered during M&A? In short, from start to finish. I know for a fact that business model elements are well known to most corporate development and strategy teams. But our observation is that as the deal progresses throughout the lifecycle, this focus tends to get blurry in the traditional “checklist blinders” of functionally-oriented due diligence and integration, when in reality, it is business model that can provide some of the most important insights and strategic directional guidance needed to ensure the deal actually accomplishes its full results as originally contemplated.