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In the year 2000, America Online (AOL) merged with Time Warner in a deal valued at $182 billion. So far, it is the second largest merger in history. When the deal was announced, Steven Case, Co-founder of AOL said, “This is a historic moment in which new media has truly come of age.” CEO Gerald Levin of Time Warner said, “Because AOL takes us to the internet, our merger with AOL will unleash immense possibilities for economic growth.” The announcement was hailed by many as a momentous coming of age for the internet.
Within a year, the two companies hated one another. Employees from both companies continually clashed with one another, and leaders from each company spent their time blaming one another for the financial losses that soon began piling up. Thousands lost their jobs. There were countless executive upheavals. Ten years later, the combined values of the two companies, which are now separated, was one-seventh of their combined worth on the day of the merger. To this day, the Time Warner-AOL merger is taught in business schools as one of the worst transactions in history. What happened?
Executives from both companies attribute the failure of the merger to market circumstances (the dot-com bubble burst), the slowdown of advertising, and the change in how to access the internet. While these issues were definitely a factor, the major reason was the clash of customer bases, cultures, and leadership approaches. These two companies were oil and water.
There are four fundamental kinds of enterprises: customized, predictable and dependable, best-in-class, and enrichment. Time Warner was a predictable and dependable enterprise and AOL was a best-in-class enterprise. They differed on almost everything: whose leadership approach was better, how to decide, who had what kind of power, structure, design of work, and much more.
Where they really differed was in their customer promises, which meant that their cultures (control vs. competence) and their leadership approaches (directive vs. standard setter) were completely different. Each had developed its own way of connecting customers, employees and leaders. Their financially motivated merger ignored the fact that they were fundamentally different living systems and thus almost killed both, reducing their combined financial values by 86 percent. Put starkly, by primarily viewing their two enterprises as financial vehicles (more revenues, cost cutting, and layoffs and more profits), and not as living systems (each having its own unique web of connections between customers, employees and leaders), they almost completely destroyed them.
They are not alone. Estimates vary, but somewhere between 50 and 83 percent of all mergers and acquisitions fail. Leaders need to learn a different way of thinking – adopt a living system-centric mind-set. They need to define a merger or acquisition as a combining of two distinct living people systems, each of which is composed of a highly interdependent network of customers, employees, and leaders.
In a merger or acquisition, how the new enterprise is led and what kind of culture it develops should be determined by the enterprise’s customer promise. All too often, the leadership and culture of the new enterprise is determined by financial accounting, market analysis, historical revenue analysis, legal due diligence, etc. These matters are important, but they shouldn’t determine the new enterprise’s leadership and culture. The customer promise of the new enterprise should determine that. Because this is misunderstood, upwards of 83 percent of all mergers and acquisitions don’t work.
I have been working with leaders in all walks of life, profit and nonprofit, for more than forty years now and have come to appreciate how hard leadership can be. It is complex and high-pressured work. And, in my experience with more than 4,000 leaders, the most difficult aspect of it is leading people.
So it’s not surprising that most leadership books focus on people-related issues. I list 50 kinds of people problems in my book, such as: persistent internal conflicts, distrust, employee disengagement, low level of cooperation, low morale, turf battles, etc. If you step back and look at all of the people problems over the years, two interesting patterns show up. One, they keep reappearing, year in and year out. Two, they are typically addressed one or two at a time. A search at the present time (November, 2018) on Amazon for books on “employee engagement” yields a list of 1,000 books.
If you drill down, however, an even more interesting pattern shows up. All these problems have to do with people separating from one another: in silos, by disengaging, by thinking they understand when they don’t, etc. When leaders believe everybody is clear about the direction of their enterprise, but employees perform in a way that doesn’t fit that direction, leaders and employees are separated. When people blame one another for mistakes, they create separation. These separations, or disconnections, involve customers, employees, and leaders, and separations between any one set (e.g., leaders and employees) impact all three.
These disconnections keep reappearing because they are symptoms of a deeper problem – hidden system disconnections. These are the root causes of people problems. My book describes four fundamentally different kinds of enterprises, named as follows: Predictable and Dependable, Best-in-Class, Customized, and Enrichment. Each of the four has its own particular set of properly ordered connections. Each leads differently, approaches its customers differently, teams differently, uses power differently, decides differently, etc. The principles of unifying and empowering enterprises are the same, but each one of the four practices these principles differently and, importantly, when one or more of these practices are implemented that don’t belong (“properly connect”), separation occurs and “people problems” show up. If you practice consensus decision-making in a Best-in-Class enterprise or practice “steward” leadership in a Predictable and Dependable enterprise, you create contradictions and crosscurrents. Because these separations are hidden, the symptoms persist or subside and then reappear.
The essential solution to “solving” people problems is to lead and enculturate your enterprise in a manner that is consistent with your customer promise. I spell out how to do that in my book.