Continuity

Continuity

C-corporations in the US can technically live forever but few do.  USA Today published a list of Public Companies 100 Years Old or More.  There were fewer than 500 public companies on that list…  (An alphabetized version of the list is available here if you are curious who made the list.)  It’s also been reported that over the last fifty years, the average lifespan of Fortune 500 companies has dropped from about 50 years to less than 15 years and falling.

It takes conscious effort, planning, and consistent execution to build a company that can endure indefinitely through time, in much the same way that we have to plan, consistently save, and reevaluate our position, to prepare for retirement.  You can’t leave it to luck.  You have to work at it every day.

In all the articles that I’ve read on the high rate of business failures, I’ve never seen anyone try to estimate the amount of money that is lost every year by companies that go out of business and their assets are either liquidated for pennies on the dollar, repurposed in a less than optimal use, or are stranded and fall idle.  There is little doubt in my mind that the amount is staggering.  What a waste!

Additionally, what about the impact on the people associated with failed businesses?  There’s the business owner, employees, customers, suppliers, the community and the list goes on.  Often there is a domino effect and a business closing causes other businesses to fail, or people to lose their cars or homes because of the loss of income, and so on.  You get the idea.  After the economic crises, we’ve seen examples of what can happen as some cities are virtually abandoned due to a lack of economic activity.  This isn’t speculation.  It has really happened and cities like Detroit are really struggling to rebuild.

We can’t continue to turn a blind eye to this problem.  Companies need to take a longer view and actively implement processes and procedures to ensure their long-term viability.  As we learned from examining the US statistics on business receipts, 97% of businesses earn less than $10 million per year.  In order to build enough critical mass to sustain through the most difficult times and have meaningful leverage in the marketplace, I believe companies need to think bigger and set their sights on reaching the $1billion annual revenue mark.

To illustrate my points, McKinsey Quarterly (Sept 2014) reported Marcus Wallenberg, Chairman of SEB (a bank founded in 1856) as saying “…we should not underestimate the significance of large, enduring firms.  From society’s perspective, think of what I call ‘rings of the water’: the indirect business generated by a large corporation like Ericsson through small suppliers, service contract technology spin-offs, and the like.  Sometimes we are too philosophical about losing large businesses and forget about the economic impact on these networks.

In the same article, Ratan Tata, Chairman of Tata Sons from 1991 to 2012 (an Indian trading company founded in 1868) was reported to have said, “I believe it’s really important to have companies survive over the longer term.  I hate to see major corporations disappearing from the scene because someone has cashed out, because the managers have been unable to escape their comfort zones, or because boards have not been sufficiently nimble to change with the times.  When these things happen, decades of effort and innovation go to waste.

In “Reflections on Corporate Longevity” also in McKinsey Quarterly (Sept 2014), Ian Davis, Chairman of Rolls-Royce, made the following points:

·         Survival is the ultimate performance measure.

·         Longevity should be measured in innovation cycles, not years.

·         A primary task of strategic management is to define the relevant planning cycles and to think about how to manage from one to the next.

·         This sort of strategic management involves regularly undertaking the difficult exercise of critically examining the fit between the company’s enduring mission, industry and business cycles, and evolving strategic priorities.

·         Legacy mindsets or the inability to escape from a successful past and to accept the huge financial and human costs of responding effectively (Kodak for example) are often a cause of business demise that is seldom mentioned.

Davis also shared 10 characteristics of organizations that successfully adapt over multiple product and innovation cycles, beyond sustained ambition and basic competitiveness, which included:

1.       Relentlessly focusing on their customers (not just their performance with customers) and understanding what their best and most innovative customers are doing.

2.       Use key suppliers as sources of insight to solve problems and identify opportunities.

3.       Actively seek to understand the broader trends outside their organizations and industries and avoid introversion.

4.       Constantly challenge legacy thinking and legacy mindsets, encouraging (and tolerating the cost of) internal competition and cannibalization.

5.       Avoid hubris by creating a culture of dissatisfaction with current performance no matter how good it is.

6.       Adopt a predominately “grown your own” talent philosophy to create a robust and loyal culture but mix it selectively and judiciously with external hires.  However, enduring companies must be willing to change their management in times of fundamental and disruptive change.

7.       Do not tolerate extended tenures in top management roles.

8.       Relentlessly focus on values and constantly demonstrate why they matter.  To be meaningful, company values must be reflected in all key managerial processes.  A company’s values are judged by actions and behavior, not words and mission statements.

9.       Meaningfully and purposefully engage younger generations in formulating policy and organizational development, both to stimulate innovation and to prevent generational barriers.

10.   Encourage their boards of directors to play an active, but supportive, role in challenging priorities and the status quo, particularly in times of success.

All of the characteristics, except for items 7 and 10, are specifically addressed by the Business Design 2.0 framework.  Providing companies with an easy to follow approach to ensure that even when times are chaotic they can evaluate where they are and where they need to be to keep moving forward toward enduring success.

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