Having advised on the organic and inorganic growth strategies of a number of wealth and asset management firms in recent years, we are struck by the influence of corporate culture on the selection, implementation, and ultimate success of strategic options.
A helpful guide in understanding corporate culture was developed by the Dutch, social psychologist and ex-IBM researcher, Geert Hofstede. Hofstede’s early research identified five dimensions along which cultural patterns can be ordered. We highlight the first three below.
Power Distance: the degree to which the culture believes that institutional and organizational power should be distributed unequally and the decisions of the power holders should be challenged or accepted. The impact of this dimension on organic growth over time cannot be overstated. A wealth management firm, for example, that allows significant autonomy (dispersion) among portfolio managers, may face greater challenges in creating operational efficiencies than firms that run a more centralized organization. On the other hand, extreme concentration of power can hinder efficiency through failing to leverage the full capabilities of a firm’s human resources.
Uncertainty Avoidance: the extent to which the culture feels threatened by ambiguous, uncertain situations and tries to avoid them by establishing more structure. Growth often requires change, whether it is in production, product design, service practices, marketing or management. And change presupposes uncertainty. Whether a firm can manage uncertainty culturally is, therefore a key determinant of growth. However, too much or constant change can undermine growth strategies by building them on too weak or inchoate a structure.
Individualism or Collectivism: the degree to which a culture relies on and has allegiance to self or the group. The adept management of motivational drivers is an important component of growth and a key to organizational structure and effectiveness. For some asset management firms, internal competition and individual performance are core growth engines. For other firms, “team” is key.
With regard to inorganic growth strategies, we believe that mergers of firms that are culturally aligned in these core dimensions are more likely to realize a successful integration of operations. If this is not the case, challenges may be pervasive across the combined firm and may result in strained management and constrained growth and profitability.
We consider a broad range of factors when setting organic and inorganic growth strategies for wealth management firms. While the numbers are important, culture is among the most important of these factors, and we believe its role should not be underestimated.