One Reason Mergers Fail: The Two Cultures Aren’t Compatible

Executive Summary

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 collect significant shopper data, while Whole Foods could lower its prices and scale up after its recent declines in sales. But a year later, stories of Whole Foods employees crying on the job over Amazon’s changes have begun circulating, and some workers have even taken steps to explore unionizing. The two companies failed to investigate their cultural compatibility before merging, and now they stand on a fault line researchers call tightness versus looseness. Tight company cultures, like Amazon’s, value routine and use strict rules to uphold cultural traditions. Loose cultures, like Whole Foods’, eschew rules, encourage new ideas, and value discretion. When tight and loose cultures merge, there is a good chance that they will clash — but, if diagnosed early, these clashes can be handled productively. To avoid the pitfalls experienced by Amazon and Whole Foods, companies considering merging should: (1) Prepare to negotiate culture from the start and identify areas for compromise. (2) Construct a prenup that outlines their integration plan. (3) Make sure everyone across both organizations understands what changes will be made and why they will be made. (4) Embrace trial and error.

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 tight-loose 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.