Defining Culture - An M&A Integrator's Model

Mark Herndon headshot
By Mark Herndon
President, M&A Partners
Oct 12, 2016

This article is the third in our series on culture. Please be sure to read Pre-Deal Cultural Due Diligence and Exploring the "Cultural Iceberg" Model. 

Culture is still one of the greatest remaining mysteries in the M&A universe. For most executives and organizations, getting a handle on culture during M&A is more than just an "unknown." It’s worse than that – it’s a conundrum, a quandary, an enigma (to put it succinctly) that keeps folks flummoxed to the point of outright avoidance. After all, far better not to even go down that path, than to end up in the cultural quicksand of so many prior failed attempts to deal with culture, right? (Please, say no!)

"...the only cultural similarities between us are that we both make products, sell them to customers and expect to get paid. Pretty much everything else is different."

To set the stage for this week’s discussion about the importance of accurately defining culture, let me pass along this true story. A friend, colleague and former client (who is also a very insightful and expert integration executive) spent many years leading a major, global process manufacturing business. Products in this industry were primarily bulk, commoditized products differentiated by branding, supply and pricing strategy, along with modest formulation tweaks. Most competitors in the industry were well known to each other, and companies routinely exchanged talent and customers back and forth. Competitors' plant and office facilities were often located in close proximity to each other. You get the picture that there were many, many similarities between the various companies in this industry, as well as substantial knowledge about each peer company.

A few months after completing the acquisition of one of their close competitors, my astute friend made the following observation: "Before we did the deal, we thought that because our businesses were so similar and because we knew the other company so well, that our cultures would also be very similar. But now we’ve realized that the only cultural similarities between us are that we both make products, sell them to customers and expect to get paid. Pretty much everything else is different."

Believe me, I can relate. Years ago as we started our integration practice, we tried to rely on the commonly accepted definitions of "culture." You know them, too. Statements such as, "culture consists of the written and unwritten rules that govern behavior; and attitudes and beliefs that drive behaviors." (Warner Burke and George Litwin); or "the way we do things around here." These statements are all 100% true, by the way, but from an M&A standpoint, none of these common definitions provide nearly enough practical substance to be very useful in the heat of battle during due diligence or integration. We were flummoxed, too.

And then an "aha" moment. In studying what companies really need to think about culture for M&A purposes, we went back to square one – we read Edgar Schein's work on culture. Dr. Schein was for many years a professor at the MIT Sloan School of Management and a global thought leader in the field of organization development. Not coincidentally, he is also the person generally credited with coining the phrase “corporate culture.” He’s forgotten more about culture than most executives will ever know. In one of his many outstanding works, The Corporate Culture Survival Guide, Schein writes:

"The biggest danger in trying to understand culture is to oversimplify it in our minds. It is tempting – and at some level valid – to say that culture is just 'the way we do things around here,' 'the rites and rituals of our company,' 'our basic values,' and so on. These are elements of culture, but none of these by themselves get to the level that really matter. A better way to think about culture is to realize that it exists at several ‘levels.’”

And that’s when it hit. Culture is more like an iceberg. You can only observe 10–20 percent of culture "above the water line," and just like the Titanic, the cultural aspects you don’t effectively understand and address will sink your ship every time.

As illustrated in Culture – An Integrator's Model, we've worked hard over the years to refine a practical, useful tool to help acquirers transform culture from an enigma into an economic driver. I'll be the first to admit that there are many good culture models, definitions, experts and resources out there. We encourage folks to adopt one that fits their requirements best. Our model isn’t scientifically validated, but it probably has more "field testing" than most. After all, it had to be a solution that could be readily deployed in an intense and dynamic M&A environment.

We’ll explore this model in more detail soon, but for purposes of a high-level overview, we believe culture is best defined as the norms and expectations driven by these three "levels," or types of cultural elements including: Symbols and Strategies; Work Processes and Protocols; and Core Values, Beliefs and Behaviors. Each cultural element tends to require a different type of fact-finding or due diligence, and each tends to correlate to somewhat different types of risk. For example, some attributes can only be observed based on experience and knowing what to look for. Some attributes can be adequately gleaned from due diligence requests and documentation. Others can only be identified through interviews and insights gained from the target company executives and staff. Others can and should be captured via formal cultural assessments.

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