Culture change enhances your firm’s performance by aligning your firm’s values and norms with a strategy that can generate a competitive advantage. This is the culture change setting studied most frequently in the book The Secret of Culture Change.
However, culture change does not always enhance your firm’s performance. In fact, culture change can hurt your firm’s performance in at least two ways:
- By changing your culture in a way that reduces its alignment with a strategy that has the potential to generate a competitive advantage. This type of culture change makes it more difficult to implement a “good strategy.”
- By changing your culture in a way that enhances its alignment with a strategy that does not have the potential to generate a competitive advantage. This kind of culture change makes implementing a “bad strategy” easier.
In his book titled Leaders Eat Last, Simon Sinek describes a culture change at the brokerage firm Merrill Lynch that hurt this company’s performance both by making it more difficult to implement a good strategy and easier to implement a bad strategy (Sinek 2014). According to Sinek, the leader of this culture change at Merrill Lynch was Stanley O’Neal.
O’Neal came to Merrill Lynch after a successful career in the treasury department at General Motors. Although he had no experience in banking, he joined Merrill in 1986 and soon rose to lead the bank’s “junk bond” division. Later, he took over the firm’s large brokerage division and became company CFO.
Traditionally, Merrill Lynch had a very employee-centric organizational culture. Employees cooperated in realizing Merrill’s core strategy—“bringing Wall Street to Main Street”—and worked together to address the needs of their customers. Employees believed that “Mother Merrill” would recognize their efforts and, in the long run, would reward them appropriately.
O’Neal had a very different view of the kind of culture that Merrill Lynch needed to have in the banking industry. Convinced that the cutthroat nature of the banking business required Merrill to identify and reward the most competitive employees, O’Neal worked hard to replace Merrill’s employee-centric cooperative culture with a highly competitive “dog eat dog” culture. In this “survival of the fittest culture,” the last man standing—and they were almost all men—would be declared the winner. And O’Neal had every intention of being that winner.
O’Neal first demonstrated this commitment to changing Merrill’s employee-centric culture by laying off thousands of employees after the internet bubble burst in the late 1990s. He demonstrated it again after 9/11 when he laid off additional employees and closed many offices.
By 2002, O’Neal had become CEO and began to isolate himself from his direct reports and other employees. Alone, he rode his private elevator to the 32nd floor of the Merrill Lynch building. Employees were instructed to never speak to him if they saw him in a hallway and to stay out of his way as he passed.
The intensely competitive, deeply hierarchical culture created by O’Neal at the top began to permeate the organization. Soon, some of O’Neal’s direct reports began to try to undercut him with the Board of Directors. O’Neal squelched these efforts as soon as he heard about them.
Under O’Neal’s direction, Merrill’s strategy shifted from developing long-term relationships with “Main Street” customers to helping create the high-risk mortgage-backed securities market. This business was very lucrative. However, in the summer of 2006, Jeff Kronthal—Merrill’s investment chief—came to O’Neal and warned him of the risks associated with the mortgage-backed securities market, risks that could bankrupt the firm.
O’Neal fired him.
Of course, the financial bubble in mortgage-backed securities that O’Neal’s strategy helped create finally burst in 2007. In October 2007, Merrill announced that it had lost $2.2 billion in the third quarter and had written off $8.4 billion in failed investments. After a failed attempt to merge with Wachovia—an effort O’Neal had failed to discuss with his board of directors—O’Neal was asked to resign and was given a severance package worth $160 million.
But, the losses created by O’Neal’s risky strategy continued. In the fourth quarter of 2007, Merrill Lynch lost an additional $8.6 billion, and in 2008, Merrill Lynch lost a total of $15.3 billion and wrote off over $42 billion of mortgage-backed securities (Statler 2017).
Ultimately, Merrill Lynch was acquired by Bank of America for $20 billion, where it currently operates under the brand name “Merrill” and is Bank of America’s wealth management division.
By changing Merrill’s culture, O’Neal hurt the company’s performance in both of the ways identified earlier.
First, the competitive “survival of the fittest” culture that O’Neal created made it more difficult for Merrill to develop long-term relationships with its “Main Street” customers—a strategy that Merrill had used for many years to build a competitive advantage in the brokerage industry. O’Neal’s new culture made it more difficult for Merrill to implement a “good” strategy.
Second, the culture he installed also made it easier for Merrill to implement what turned out to be a very risky strategy for the firm—an effort to build and exploit the mortgage-backed securities market. O’Neal’s new culture made it easier for Merrill to implement a “bad” strategy.
The story of Stanley O’Neal and his handling of the Merrill Lynch culture should be viewed as a tale of warning. Pushing your idea of culture change without a well-executed plan or buy-in from the team sets everyone up for failure. However, if you want to successfully change the culture so everyone wins, you can start by picking up a copy of our book, The Secret of Culture Change, and learning from the lessons of others.
References:
- Sinek, Simon. 2014. Leaders Eat Last. London, United Kingdom: Portfolio Penguin.
- Statler, Kate. 2017. “The Demise of Merrill Lynch: Revisiting Its Monumental Write-Down 10 Years Ago.” Forbes. October 24, 2017. https://www.forbes.com/sites/katestalter/2017/10/24/the-demise-of-merrill-lynch-revisiting-its-monumental-write-down-10-years-ago/?sh=61a324fb53bb.
Author: Jay Barney is one of the top three most cited scholars in the field of strategic management, who has published over 125 articles and book chapters, along with seven books. He is a full-time professor at Eccles School of Management at the University of Utah. Connect with Jay at JayBarney.org