Culture Eats Strategy for Breakfast

Culture Eats Strategy for Breakfast; Management, Get It Right This Time!

[4-min read]

I wish I had come up with this quote but unfortunately, the late Peter Drucker beat me to it. But what an excellent, simple, to-the-point, and oh-so-true statement.

Watch this short, 5-minute video.

Although this talks about organizational culture, it is very much true for National Cultural Differences as well.

Everybody gets it: culture eats strategy for breakfast. But why do so many companies (well, people in companies) brush over cultural differences so quickly and easily? For some strange reason, many executives working for internationally operating companies think that cultural differences do not play a role in their organization.

It’s like thinking that smoking is not bad for your health. Well, even though you might not die of smoking that doesn’t mean that smoking isn’t bad for your health. The same holds true for cultural differences: you might deny that they play a role, but that doesn’t take away the fact that cultural differences do play a (crucial) role when working internationally.

When it comes to working internationally, making cultural competence an integral part of your strategy is an absolute must. Remember, Culture Eats Strategy for Breakfast.

What Are Some Examples of International Failures?

Below are a series of failed international mergers. These failures mainly occurred because of national cultural differences. In every instance here, you can see that Culture eats Strategy for Breakfast!

Read them all, or skip them if you want to have some concrete tips on what to do to avoid this. Click here to skip the examples.

Daimler (German) and Chrysler (USA)

When German Daimler (the maker of Mercedes-Benz) merged with American company Chrysler in the late 1990s, it was called a “merger of equals.” A few years later it was called a “fiasco.” Discordant company cultures had the two divisions at war as soon as they merged. Differences between the companies included their level of formality, philosophy on issues such as pay and expenses, and operating styles. The German culture became dominant and employee satisfaction levels at Chrysler dropped off the map. One unhappy joke circulating at Chrysler at the time was “How do you pronounce Daimler Chrysler?… ‘Daimler’—the ‘Chrysler’ is silent.” By 2000, major losses were projected and, a year later, layoffs began. In 2007, Daimler sold Chrysler to Cerberus Capital Management for $6 billion.

Microsoft (USA) & Nokia (Finland)

Microsoft was late to the mobile game and quickly fell behind Apple and Android in the platform wars. While November 2010 saw the release of the new Windows Phone with a new platform, it never caught on with consumers. In 2013, Microsoft CEO Steve Ballmer saw an opportunity in Nokia, a Finnish phone company that was losing ground to competitors. Ballmer led Microsoft’s purchase of Nokia for over $7B in a deal finalized in 2014. But the acquisition quickly turned into a flop as their new joint project, the Lumia phone line didn’t garner the developer and carrier partnerships needed for the phone to catch on. Ballmer left Microsoft that same year and new CEO Satya Nadella had to do significant restructuring and layoffs to streamline the company, including cutting 15,000 Nokia employees. In 2015, the acquisition was written down for $7.6B.

Caterpillar (USA) & ERA (China)

In a deal that aimed to open the Chinese coal markets, US heavy-equipment behemoth Caterpillar paid $677M in 2012 to acquire ERA Mining Machinery Ltd. ERA was the holding company for Zhengzhou Siwei Mechanical & Electrical Equipment Manufacturing Co Ltd., a leading producer of hydraulic coal-mine roof supports in China. The Chinese coal market is one of the biggest in the world and this deal looked like easy money. But money was just the problem: due diligence oversights on Caterpillar’s part and alleged “deliberate, multi-year, coordinated accounting misconduct” at Siwei were uncovered months after the deal closed and Caterpillar took a $580M non-cash goodwill impairment write-down in 2012. Siwei’s former CEO, Wang Fu, claimed no wrongdoing, but Caterpillar’s investment still tanked and over 2,000 Siwei workers were terminated or furloughed in the wake of the discovery.

HP (USA) & Autonomy (UK)

Chairman and CEO Leo Apotheker, during his brief time in charge at HP, backed the company’s $11.1B acquisition of Autonomy, a European data analytics company. Aside from baffling industry experts as to how the new company would fit into HP’s strategy, it came out in 2012 that Autonomy had cooked its books and had been massively overvalued during the acquisition. With Apotheker fired in 2011 for a slew of missteps that had contributed to the company’s massive losses, nothing ever came of the acquisition. Instead, Autonomy’s purchase was written down as a $9B loss and in 2016 HP sold off its Autonomy assets.

Alcatel (France) & Lucent (USA)

The merger of Alcatel and Lucent was supposed to create a multinational telecommunications powerhouse capable of dealing with the rising threat of low-cost Asian manufacturers. Instead, the merger was plagued by a complex deal structure and cultural clashes between the French Alcatel and US-based Lucent. By 2008, six consecutive quarterly losses later, CEO Patricia Russo and former Alcatel CEO Serge Tchuruk resigned from the company, reportedly unable to work together. The company continued to struggle until 2016 when Nokia acquired the company.

Toshiba (Japan) & Westinghouse Electric (USA)

In the mid-2000s, the nuclear energy business was supposed to take off, and Japanese conglomerate Toshiba wanted a slice of the pie and purchased Westinghouse Electric, one of the largest manufacturers of nuclear reactors in the world. Toshiba already built nuclear power plants locally in Japan, but the acquisition would allow it to expand and win contracts in new markets like China and India. Toshiba obtained 77% of the nuclear power company for $4.2B — a decision that nearly caused the Japanese company to go bankrupt. The problems stemmed from higher-than-expected construction costs and delays at two American plants. Toshiba was forced to write off $6.3B in losses, declare bankruptcy at Westinghouse, and eventually sell the Westinghouse unit to Brookfield Asset Management.

Credit Suisse (Switzerland) & Donaldson, Lufkin & Jenrette (USA)

In 2000, the Swiss bank Credit Suisse acquired the brokerage Donaldson, Lufkin & Jenrette (DLJ) in an effort to bolster its investment banking arm. Credit Suisse paid nearly three times the book value for DLJ and got little in return. The biggest problem was one of culture, and much of DLJ’s key talent left the company following the acquisition. Nearly two decades after the acquisition, in 2016, Credit Suisse wrote off $3.8B in losses associated with the acquisition of DLJ.

Vivendi (France) & Seagrams (USA)

By the mid-1990s, Vivendi had come a long way from its humble origins as a French water company to a media powerhouse, fueled by the acquisitions and deals in the media and telecom industry. In 2000, the company acquired Seagram, the owner of Universal Studios, for a $32B all-stock deal. The internet revolution was just underway, and the acquisition was intended to allow Vivendi to capitalize on Universal’s large film and music library through its internet portal, Vizzavi, and compete with AOL Time Warner. Unfortunately, Vizzavi never took off. By 2004, Vivendi was burdened with debt and sold 80% of Vivendi-Universal Studios to GE. It took Vivendi another 15 years of litigation to settle a $26M lawsuit that it had misled shareholders over the deal.

Deutsche Bank (Germany) & Bankers Trust (USA)

Back in the mid-1990s, Deutsche Bank was looking to compete with Wall Street banks like Goldman Sachs and JP Morgan by acquiring institutions like Bankers Trust, a troubled Wall Street firm that had just suffered a corporate accounting fraud scandal. At the time, Bankers Trust specialized in two things: risky financial derivatives and making loans to businesses that other banks wouldn’t take on. Even with the scandal, by buying Bankers Trust, Deutsche Bank became a global investment bank. For a time, it seemed like the gamble had paid off. In mid-2007, Deutsche Bank was the world’s biggest bank, with nearly $2T in assets. But 16 years after it bought Bankers Trust, Deutsche Bank wrote off billions of dollars from the acquisition.

BMW (German) & Rover (UK)

BMW’s acquisition of Rover in 1994 was driven by two factors: Rover’s previous owner, British Aerospace, was in financial difficulty and looking to drop the brand and, at the same time, BMW was looking to expand its offerings. Iconic Rover brands like Land Rover and Mini seemed like a perfect means to reinvigorate the venerable German auto company and so BMW acquired an 80% stake in Rover for £800M ($1.43B) in 1994. Cultural differences kept the two companies from really meshing, though, and Rover started taking heavy losses almost immediately. Eventually, BMW started selling off Rover assets, including the Land Rover name itself to Ford in 2000. BMW kept the Mini brand, though, which the company still sells.

Sony (Japan) & Columbia Pictures (USA)

In 1989, Sony paid $3.2B in cash and $1.6B in debt to purchase Columbia Pictures. Sony paid a steep premium on the deal, shelling out an estimated $27 per share compared to Columbia’s share price of $12 at the beginning of that year. Recognizing the mismatch between corporate cultures, Sony executives mistakenly made the decision to allow Columbia to operate independently and autonomously. Costs at Columbia Pictures ballooned, while most of its big-budget films produced in the years following the deal flopped. By 1994, Sony had written off $2.7B of its investment in Columbia plus an additional $510M in operating losses from the unit.

To find a complete overview of more failed mergers and acquisitions, go here.

The list of failures is a lot longer than the number of successful international M&As. And even with the overwhelming number of failures, many C-level managers forget to look at the intercultural aspects of doing business internationally.

Management, Listen Up: Culture Eats Strategy for Breakfast. Also your strategy. Don’t be stupid; you can avoid these mistakes.

What are Some Examples of International Successes?

Surprisingly, when doing the research for this article, I couldn’t find a very long list of successful international mergers & acquisitions. Here is a hand full:

• Good transaction of InBev and Anheuser-Busch
• M&A transaction of Shell and Royal Dutch Petroleum
• Mergers and acquisitions deal of J.P. Morgan and Chase
• Successful transaction of Disney and Pixar
• Good mergers and acquisitions transaction: Exxon / Mobil

Most of the successful mergers & acquisitions were within one culture (US company merging with another US company). Of course, this way you don’t have to look at the international & intercultural sides of that merger.

What About Brexit?

The country that will likely have to change its international approach the most is the UK. Irrespective of the outcome of the Brexit, the relationship that the United Kingdom will have with the EU will be different.

So where can the UK turn to?

The obvious markets will be more and more Asian countries. Second place, but possibly an easier one, due to the language and comparable cultural profiles, will be the United States.

But in Asia and the United States, cultural differences play an important role in doing successful business in those areas. Think about the following differences and see the table below with the four primary dimensions of culture:

• Hierarchy: is significantly higher in all Asian countries compared to the UK
• Loyalty: In China, contracts are of much lesser importance than in the UK. In China, the relationship with your business partner comes first (=low score on Loyalty ==> Loyalty to the group). In the UK it is getting things done (the task).
• Predictability: (unofficial) rules and regulations (how do you greet? What’s the level of detail on project plans and contracts?) are different between the UK and Asian countries.
• Goal Orientation: this typically plays a role in business between the USA and the UK. How do you circumvent the “not invented here” syndrome?

For a full article on Brexit and its business and cultural implications, read this. In that article, you can, again, read that Culture Eats Strategy for Breakfast.

What About Technological Developments?

Should you believe all the hype about AI (artificial intelligence)? Are we on the brink of a technological revolution that we have never experienced before? Computers will take over mankind…?

I’m not here to speculate on whether this is true or not, but here are some real realities that are already in place:

• Google can predict a cold and flu epidemic 5 days earlier than the (UK) National Health Services.
• China is about to implement its Social Score system for its population.
• Facial recognition software is better at detecting whether someone is homosexual than humans are.
• Computers beat humans in the most sophisticated games possible.
• …

But most likely AI will only take over a number of tasks currently done by humans. Contact between humans will still remain. And in my humble opinion, will only become more important.

Humans are such emotional beings with their own belief systems (= Cultural Upbringing) that we will keep needing human interactions to keep us sane and… to do business.

How to Include Cultural Competence in Your Strategy?

Using the metaphor of a pizza you can describe or look at developing your strategy in the following way:

Consider the different pizza slices as different aspects of your strategy. Example:

• Mission & Vision
• SWOT analysis
• Objectives & Tactics
• Financial resources
• Human resources
• Time
• Intercultural Competence (I can’t say it enough: Culture Eats Strategy for Breakfast)

Intercultural competence must be part of your strategy. If it isn’t you’re missing the point and there’s a good chance you’ll end up in the Failed list of internationally operating organizations.

What Can You Do?

Here are some really simple things you can do to boost your cultural competence:

• Realize that it’s important to be culturally competent
• Invest in cultural awareness and cultural skills development. How?
• Follow a workshop
• Get your people to listen to a cultural lecture
• Train your intercultural skills and those of your people
• Get in touch with me

Don’t be stupid and think that cultural difference is easy to deal with. It isn’t easy and it will eat your strategy as well.

Remember, Culture Eats Strategy for Breakfast

Want to avoid the most common mistakes when working internationally? Read this article.

An article on employee motivation can be found here.

The article “9 signs you’re not getting it; it’s culture stupid” can be found here.

An infographic on organizational culture can be found here.

Here’s a specific article about doing business in Asia.

Culture Matters