Long-Term Business Success: It's Evolution, Stupid

Virtual Teams: Different- Not More of the Same

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January 2010

Long-Term Business Success: It’s Evolution, Stupid.

Studies indicate that the average life expectancy of a company, regardless of size, is less than 20 years and for global Fortune 500 companies (companies that have definitely become successful) it is between 40 and 50 years. Yet, there are many large, multinational companies that have survived over 100 or 200 years. How are they able to survive economic booms and busts, political upheavals, technological revolutions and changing customer needs? What can we learn from these companies as well as from recent examples of companies that survived the most recent recession in better shape than their competitors?

In his book The Living Company, Arie de Geus, group planning coordinator at Royal Dutch Shell presents research findings of his a study of 27 multinational companies ranging in age from 100 to 700 years. His goal was to find out what a global company such as Shell needed to do to successfully extend its life as a healthy, thriving firm.

He found that what he called living companies “have a personality that allows them to evolve harmoniously” (emphasis added). Like species who survive by mutating, companies survive by behaving in ways that allow them to adapt to a changing environment.

Stora, a company that started out in the copper business over 700 years ago has changed its business focus a half a dozen times including shifting from copper to forest exploitation to chemicals. Their goal was not to be in the copper or forestry business. Their goal was to survive as an organization. They did not exist to be in copper. They were in copper in order to exist.

So when conditions changed, they were willing to dump copper assets and get into anew product or service. Unlike so many companies today who cut people and programsto maintain their hard assets and current products above all else, long-livedcompanies understand that hard assets and products are just a means to survive –they are not the company’s reason for being.

How companies successfully evolve.
De Geus found four personality traits that explained their longevity and their ability toadapt. They are:

1. Sensitivity to the world around them
2. Tolerance of new ideas
3. Awareness of their identity
4. Conservatism in financing.

All four traits work together to help companies evolve and survive.

Sensitivity to the world around them. Long-lived companies were always scanning the external environment to get as much warning as possible of significant changes in technology, the economy, politics, etc. By being aware of potential changes in the external environment, it gave them time to consider different options for survival. They were continually learning.

Tolerance of new ideas. They supported constant experimentation. They were constantly testing options. By encouraging the exploration of new ideas, employees came up with new business opportunities that allowed them to adapt quickly to changes in the environment. New ideas kept them nimble.

Awareness of their identity. They had a strong sense of community built on common values. As a result, employees strongly identified with the company and were motivated to support its survival. de Geus believes, ''companies die because their managers focus on the economic activity of producing goods and services, and they forget that their organizations' true nature is that of a community of humans.'' Long-lived companies did not forget that their purpose was to survive for the good of the community. Their purpose was not to maximize shareholder value. Profits were not the driving force, but a result of being healthy.

Conservatism in financing. Long-lived companies did not risk their capital by highly leveraging their company. By having cash on hand they could snap up options and quickly take advantage of opportunities. Access to cash allowed them to grow and evolve. Low levels of debt made financing easier and the company less vulnerable to a takeover.

These four competencies worked together to enable long-lived companies to continually transform themselves so they could adapt to changing conditions.

Lessons from the 1990s recession.
Lessons from the last recession support de Geus’ findings and particularly the contention that the most successful firms focus on adapting and changing for the longterm as opposed to just cutting costs for the short term. Watson Wyatt in their study, How to Cut Costs Without Cutting Off Future Growth: Lessons From the Restructurings of the Early 1990s, found several practices that differentiated firms who came out of the recession with significantly higher total shareholder return over the following five year period.

Their study found that:
How much companies cut costs had no correlation with success, but maintaining healthy cash flow and reducing debt did. This finding is in line with de Geus’ finding on the financial conservatism of long-lived companies.
Firms that engaged in mergers, acquisitions and divestitures or major reorganizations did significantly better than firms that downsized. That is, firms that refocused and/or increased their options did better than those who just cut costs bygetting rid of people.
Firms whose restructuring emphasized independence or survival versus emphasizing customer service, efficiency or growth “increased their probability of success by over 13 percent.” In addition, the research found that “… survival andindependence are much easier to communicate and for everyone to rally around than the others, leading to more effective teamwork between management and other employees and thus increasing the chances of success.” That is, emphasizing the survival of the community versus dictating specific business goals or metric was a better motivator and allowed for the freedom and creativity for employees to explore ways for the company to adapt to a crisis.
“Successful restructuring firms implemented hiring freezes 7 percent less often than unsuccessful organizations, enabling them to hire employees with new skill sets as necessary.” By focusing on how to adapt as opposed to how to cut costs, the more successful firms were able to quickly hire people with the news skills needed to respond to changes in the marketplace.
“Firms that use a RIF [reduction in force] for short-term cost cutting often have to rehire or replace significant numbers of employees lost during the restructuring process. As we have seen, this significantly reduces the chances of a successfulrestructuring and damages the firm’s prospects for long-term growth.” That is, layoffs may provide short-term cost savings, but actually hurt growth in the long run by making firms slower to adapt.

The study concluded that it is possible to reduce costs and lay the groundwork for future growth that outperforms your competitors. The reduced costs are a result of the transformation needed to adapt, not an end in itself.

The Watson Wyatt study also quotes research by Wayne Casio who found that “…more successful firms view employees as assets to be developed while the larger majority of less successful restructurers see employees as costs to be cut.”

People are the assets that help companies adapt.
The lessons from both studies are clear. In order to survive hard times, successful companies transform themselves. And, people are the asset that helps them adapt, not hard assets and products.

Treating people as assets is not just a touchy feely belief. It results in better long term results.

For example, Jim Goodnight, CEO of SAS (recently named by Fortune as the #1 best employer to work for) says "My chief assets drive out the gate every day. My job is to make sure they come back." He consciously tries to build a community (he actually lives on campus). As a result, he gives them freedoms, perks and benefits that would make most CEOs and CFOs cringe. However, it makes perfect business sense.

As Fortune states, “Academicians confirm that his policies augment creativity, reduce distraction, and foster intense loyalty -- even though SAS isn't known for paying the highest salaries in its field and even though there are no stock options.” Goodnight states that his values create commitment and loyalty that helps makes boom and bust cycles non-existent at SAS because employees are in it for the long haul.

What motivates people to constantly evolve?
Loyal, committed and creative employees are essential to the long-term health of a company. How do you motivate employees to constantly experiment on the periphery and to help a company adapt?

In his latest book Drive, Dan Pink explores motivation. Basically, he cites overwhelming scientific evidence that creative problem solving is best motivated by intrinsic, not extrinsic rewards. The traditional carrot and stick approach (if you solve this problem you get a reward) actually stifles creativity.

Pink states that there are three conditions that motivate the right-brained thinking that leads to creative problem solving:
1. Autonomy (supporting the urge to direct our own lives)
2. Mastery (supporting the natural desire to get better and better at things)
3. Purpose (enabling the desire to accomplish an objective in the service of something larger than ourselves).

De Geus’ long-lived companies encouraged and nurtured all three of Pink’s conditions by supporting a higher purpose than just one’s job (survival of the human community) and allowing for constant experimentation and learning.

That is, the long-lived companies set up a virtuous cycle. By establishing an environment that taped into people’s intrinsic motivations to be creative problem solvers, the company was able to successfully evolve and adapt to a constantly changing competitive environment, which in turn maintained the life and health of the community in which the people worked. In exchange for their commitment and hard work, employees get an environment in which they can develop their potential.

Particularly in today’s business environment, growth and survival are more dependent on knowledge than hard assets. Therefore, the goal for companies needs to shift from maximizing return on hard asset capacity to return on brain capacity. Companies that survive recessions and other dramatic shifts do so by having employees who can help them adapt to the changing environment. Companies evolve not by cutting people to save their assets, but by using people’s ideas and insights to save the community by transforming the business.

Seems simple. Seems like common sense. There is plenty of evidence to support it.

I just hope more companies have the courage to learn from the past.