Collection of Thought Pieces on Learnings from Three Box Solution: Number 24
Managing Cultural Conflicts
In fast moving industries, it can be devilishly difficult to stay ahead of the curve. When confronted with a brash startup wielding a revolutionary technology, incumbents can fight… or they can simply reach into their deep pockets and acquire.
The logic for doing the latter is compelling. By acquiring the startup, the incumbent gains immediate access to the new technology and the breakthrough growth that it may generate. It increases the odds of the startup’s success by giving it access to mammoth assets such as existing brands, customers, and manufacturing facilities. And, it protects itself from the possibility of being completely left out in the cold as a new technology changes the industry.
But it’s no secret that many acquisitions fail to achieve the desired benefits. It’s much simpler identifying potential gains on paper than smashing through the barriers necessary to bring two distinctly different organizations together. And when big buys little and mature buys new, the organizational degree of difficulty becomes particularly high.
Overcoming the challenge of somehow stitching together tradition and invention couldn’t be more important in industries facing major transitions. Consider pharmaceuticals, where the dominant model is shifting from the population-based, blockbuster drug model to more targeted therapies tailored to patients’ unique genetic makeup. To sustain excellence through the transition, the major pharms will have to build entirely new competencies — one important mechanism for doing so, being the acquisitions of biotechnology startups.
Regular readers of this column know that our most frequent topic is best practices for building new businesses within established organizations — as in, building from scratch. Corporations that choose instead to acquire young companies, though, still face the same challenges. For the newly-acquired company, “NewCo,” to thrive within “CoreCo,” there must be a fine balance between separation and integration. It’s easy to destroy NewCo, even when both sides join with the best intentions.
Though technology considerations may have led to the acquisition, organizational decisions will make or break the purchase. NewCo comes into the process with an entirely different organizational DNA, and much of that distinctness must be maintained. CoreCo must forget its assumptions about success, and be ready to question second nature assumptions about how it manages its organization. Most likely, NewCo will benefit from different approaches to hiring, promoting, hierarchy, metrics, management processes, culture, and more.
Unfortunately, past merger experiences may lead CoreCo in a different direction — particularly if such experiences included a major merger with an industry peer. The primary objective of such mergers is usually to achieve economies of scale, one of the most obvious ways involving support functions. But many support functions — particularly IT, HR, and strategic planning — have direct and dramatic impacts on organizational DNA. Consolidating here may save a few dollars, but ultimately destroy the organizational fabric that enables NewCo to win in a game much different from CoreCo’s.
The acquiring company should be very selective in choosing to integrate its own processes with NewCo’s. Where incremental cost saving is the only benefit, NewCo should remain fully independent. But CoreCo likely has at least one or two assets which NewCo could formerly only dream of. Consider the power of an experienced pharmaceutical sales team to a nascent biotech startup.
Giving NewCo the ability to leverage CoreCo’s assets is never as easy as drawing a line on an org chart. Building cooperation between two entirely different organizations, with very different priorities, is a touchy proposition. That’s why the most important priority for the senior management team should be ensuring that one or two valuable links between NewCo and CoreCo work. Everywhere else, leave NewCo alone.