3 Principles of Corporate Longevity

I came across a study by Zenlin Kwee from the Erasmus University in Rotterdam that discusses some strategic principles of long-lived firms.  As with most other studies of old companies, this one focuses on a very small data set. In fact, Kwee's work is an in-depth study of just two firms in the same industry: Shell and BP.  The three principles of "sustained strategic renewal" which he identifies are interesting:

1. Manage the internal rate of change to match or exceed the external rate of change
2. Optimize the principle of self-organization (this principle implies the delegation of decision making to the lowest possible level and maximizing capabilities at every level of the organization)
3. Engage in concurrent exploitation of existing capabilities and exploration of new opportunities (this involves balancing innovation and knowledge creation with improvements in productivity process, efficiency and product extensions and enhancements)

When Leadership Matters

One of the most frequent questions I receive about the characteristics and behaviors of companies that have survived over 100 years is why I haven't identified any particular leadership behaviors. As I've said in earlier posts, the short answer is that no consistent leadership qualities emerged from the research. Most companies revere their founder or another leader who led the company during a critical juncture in the firm's history. And most of these companies have leaders who have "grown up" in the company, which usually produces some consistency in leadership style within a particular organization. But there was not any consistency in leadership behavior across organizations. What did seem important was that the leaders follow the principles of survival: have a strong core ideology and corporate values that drive your business; invest in experimentation and change while protecting those core values and building on your strengths; develop true partnerships with your constituents and learn from the relationships throughout your value chain; and practice conservative financing.

Of course leadership matters, and these companies thrive under astute leaders who make good business decisions. But they also seem to survive under poor leadership as long as these core principles are not violated. I'm writing today about one of the principles - drive for change while building on your core values and unique competencies. Following is a story about how two different organizations navigated through very difficult business transitions. The different approaches in implementing the necessary changes provide a good example of what a difference it makes when a leader follows this principle.

Both organizations had very strong cultures that were employee-focused: they provided good pay and benefits, including profit-sharing and a management style that included employees' opinions in the decision-making. As a result employees stayed with the firms and the companies had many employees with several decades of service. Both companies were going through a leadership transition with the retiring CEO having spent his entire career with the company. and both were also facing difficult industry dynamics resulting in a rather dismal business forecast. Company A brought in a young but well-respected leader who was president of a smaller company in the industry; Company B promoted their CFO - also young and well-respected. Both new CEOs believed their company had become too inwardly-focused and that the culture needed to change if the company was to succeed in the new competitive reality facing the firm. Both companies were more "differentiators" than "cost leaders" with products that were fast becoming commodity-like in terms of customer purchasing behavior. It is the difference in how they navigated the company through the changes they thought necessary that is the lesson.

Company A's new CEO's first action was to fire or retire much of the leadership team. Many of the people he brought in the replace them were young leaders who had worked for him in his previous company. His instructions to them were to change the culture of the company from what he saw as one of employee entitlement to one of operational efficiency. When falling sales drove the need for employee cut-backs, he saw this as an opportunity to remove many long-term employees whom he felt were barriers to change. He also shifted investments from the firm's traditional R&D focus to ones that would improve manufacturing efficiency. The people who remained in the company weren't quite sure how to be effective in this new reality: they became demoralized and lamented the loss of the company as they knew it. The new CEO never was able to turn the company around and it limped along until it was bought by a competitor.

Company B's new CEO also believed major changes needed to take place, but he went about it in a very different way. He built the case for change and presented the facts to employees. Then he used the culture of the company to drive the changes. Once employees understood the reality of the company's current situation, they were asked for their ideas and help in making the needed changes. The CEO promised he would continue to invest in the company's core competencies - that they would continue to produce new and innovative products - but that they also needed to find a way for their operations to become more efficient. Employee involvement was a long-standing tradition in the company and the new CEO used the culture to make the necessary changes rather than abandoning it. This company also needed to reduce their workforce because of deteriorating industry conditions, but did so in such a way that they still ended up on FORTUNE's list of best companies to work for. This company continues to introduce "disruptive" products, but it is also one of Toyota's prize TPS pupils.

The point of this story: Don't walk away from your past when change needs to take place. Build on it. The company's culture and core competencies are not things that never change or evolve: rather they are the building blocks used to make the changes. Change is absolutely necessary to survive over the long term - but how you change makes a difference: Drive for change by building on your company's core competencies and unique technologies rather than abandoning them. Yes, leadership matters. But it's not your particular style that makes the difference - it's your ability to practice the principles that enable company longevity.

Data Base at 1,000 Companies!

Our data base of 100-year-old U.S. companies now officially has 1,000 members. Though this represents just 0.01% of all U.S. businesses, it is a substantial group to research. Two-thirds of the companies are privately held - many are family owned. Half employ over 500 employees. Nearly 40% are manufacturing organizations and nearly 20% are banking and finance institutions; retail is the only other category coming in at over 10%. More info to come.... We will be sending out surveys soon.

How I Love the Smell of Pickles in the Morning!

Holland, Michigan is the home of one of the oldest Heinz factories in the country. 115 years ago, Heinz made agreements with area farmers and the city of Holland that resulted in the building of a pickle factory that has been a fixture in the city ever since. Every summer, the unmistakable aroma of vinegar wafts through the air - not every day and not overpowering. That smell on my walk to campus in the morning reminded me of one of the "survival" behaviors of long-lived companies: the development of long-term relationships - with employees, customers, suppliers and communities. In 2008, when Heinz built a public waterfront walkway in front of their plant for the enjoyment of community residents, they posted a bronze plaque telling the story of the company's relationship with the Holland community. In part, this plaque reads:

In December 1896, Heinz committed to building a pickle factory in Holland if local farmers would pledge 300 acres of cucumbers for Heinz and if the city of Holland would donate a building site with water shipping access and a rail siding. Local citizens and farmers pledged more than 500 acres of cucumbers, and the City of Holland purchased two acres of land for $800 on the present day site. Today, the Heinz facility includes 17 buildings covering 29 acres. The passion and dedication of past and present Heinz employees along with the spirit of cooperation between the City of Holland and the H.J. Heinz Company has allowed Heinz to grow and prosper in Holland, MI.

The City of Holland donated two acres of land to Heinz 111 years ago to build a pickle factory. Today, Heinz is honored to be able to give back to the City of Holland and its citizens, access of more than 1,800 feet of Lake Macatawa shoreline via the Heinz Walkway.

Long-lived companies understand they are part of an ecosystem that depends on all parts working together and supporting each other.

Up to 880 Companies Over 100 Years Old!

The list of public companies over 100 years old that was published by USA Today last week has given me a number of additions to my data base of old companies. A great many of the additions are financial institutions or utilities. My student researchers will be recalculating statistics for quite a while!

USA Today Celebrates 100 Year Old Companies

The June 16 issue of USA Today had a nice article about IBM's 100th anniverary (birthday?). In it they quote Jim Collins of "Built to Last" fame - and me! The reporter had Standard & Poors compile a list of publicly traded U.S. companies over 100 years old, which has given me a number of companies to add to my data base. CBS Sunday Morning also had a segment on IBM's reaching the century mark...as did Forbes...and The Economist...and The New York Times. IBM has done a good job of letting people know about their achievement and bringing focus to what it takes for a corporation to survive over the long term. "One central message," says the Times article: "Dont' walk away from your past. Build on it. The crucial building blocks...are skills, technology and marketing assets that can be transferred or modified to pursue new opportunities. Those are a company's core assets....far more so than any particular product or service."

Perhaps because IBM went through some very difficult times during the 1990s they are especially celebratory now to have made it to the 100 year mark. Whatever the reason, IBM is doing a great job letting the world know about their new membership in the Century Club!

Happy 100th Birthday to IBM

On June 16 IBM turns 100 years old - the same year it reaches $100 billion in sales. An interview conducted with IBM CEO Sam Palmisano by Forbes' publisher Rich Karlgaard reinforces many of the behaviors we have found in companies that have made it to the century mark. Palmisano says Tom Watson Sr., legendary IBM CEO, "believed if you really created value and not just technology you could be around a very long time. That is more enduring than just getting big."

When asked how he balances short-term and long-term financial goals, Palmisano explained: "We don't run IBM in quarterly cycles, even though there's tremendous pressure to do that, to give quarterly guidance within a penny. You certainly have to make your numbers. But I just feel it is wrong for the long term to run a company like that. That's why...we came up with our road map....to communicate to investors, as well as its employees, about the long term."

CEO since 2002, the people on Palmisano's management team are company veterans: "All the people who work for me today have been here 25 or 30 or 35 years," he says - a common profile seen in companies who are members of the century club.

Palmisano readily acknowledges the last 100 years have not all been smooth sailing - the early 1990s were particularly tough - but by refocusing on what they do well ("deep analytics....that's what IBM does....that's what differentiates us") they are proudly celebrating their 100th year positioned well for the second century.

What is the oldest company in the world?

I was being driven around York, England by a real estate agent looking at apartments to rent for the fall when I will be teaching there. We were talking about our jobs and he asked me about my research. When I told him I studied 100-year-old companies he asked me if I knew what was the oldest company in the world. I admitted that I did not. "Well I do!" he says. He had just heard a piece on the BBC about Stora, the Swedish mining company that dates from 1288 and some claim to be the oldest company in the world. Though my research focus is on U.S. companies over 100, I decided to look into this question about the world's oldest company.

Stora may be one of the oldest large corporations, but there are some older institutions - several of them in Japan and many of them in either the hotel or beverage industries. Three of the oldest: Keiunkan, Hoshi and Koman are all hotels (ryokans or onsens) founded in the early 700s.

The Marinelli Bell Foundry in Italy, successor to a company in operation since the early 1000s, is considered Italy's oldest family business. The Goulaine winery in France also traces its roots to the early 1000s and is generally considered the oldest European family-owned business. However, St. Peter Stiftskeller (restaurant) in Salzburg, Austria is said to have been in continuous operation since 803.

Another of the contenders for oldest company is Tanaka-Iga, a Japanese manufacturer of items used in religious shrines and ceremonies, founded in 885. And then there's Genda Shigyo, which has been making paper bags in Japan since 771.....wonder what people carried in paper bags back in the 8th century?

Regardless of how you define "oldest company" these are interesting organizations!

Creating Shared Value: The New "Old" Big Idea

In the January-February 2011 issue of Harvard Business Review, Michael Porter and Mark Kramer published an article saying that we could unleash a wave of innovation and growth by reinventing capitalism. Their proposal is to update our view of the way companies create value from one of optimizing short-term financial performance to one of what they call "shared value." They define this as "creating economic value in a way that also creates value for society by addressing its needs and challenges." By developing policies and practices that enhance the competitiveness of a company while simultaneously advancing the economic and social conditions of the communities in which it operates, this concept of shared value focuses on identifying and expanding the connections between societal and economic progress. The authors go on to say that the purpose of the corporation must be redefined as creating shared value for the company and society, not just profit for the company.

This "new" proposal for how to reinvent capitalism appears to be very similar to one of the common operating principles of most of the 100-year-old companies I have studied. These companies see themselves as part of an integrated web of relationships with their community and the other partners in their value chain; their purpose is generally described in terms of the broad value they provide rather than profitability. As Danny Miller and Isabelle Le Breton-Miller argue in their book Managing for the Long Run, "The same attributes that have long been vilified as weaknesses of [these] businesses....have actually created formidable competitive advantages for these firms." It seems we have much to learn from these old companies: Even if their practices are not what we have been teaching in our business schools, some of our leading business strategists are now identifying practices very much in line with how they have been doing business for decades.

Can A Company "Die" Prematurely?

This question was asked in a recent Wall Street Journal management blog. The author said that economists generally answer that institutions die when they deserve to die - that is, when they have shown themselves incapable of fulfilling stakeholder demands. But then the blog went on to say that this assessment misses an important point: that just as a person's death can be untimely, so too can corporate death, at least from the perspective of society at large. The author posits that organizations grow and prosper by turning simple ideas into complex systems and that complexity takes time - a reason to encourage organizations to adjust their strategies to pursue a long-term mission.

This blog reminded me of the book that got me started on my study of old companies, Arie de Geus' The Living Company: Habits for Survival in a Turbulent Business Environment. In the prologue to his book, de Geus states that if you look at corporations in light of their potential longevity, most are dramatic failures - or, at least underachievers. The large, multi-national companies, he says, live an average of 40-50 years. Other studies on life expectancy of firms regardless of size indicate an average of 12.5 years. Knowing that companies can survive for well over 100 years, the implication is that a gap exists that represents wasted potential. De Geus maintains that no living species endures such a large gap between potential life expectancy and average realization. Moreover, few other types of institutions (such as churches or universities) seem to have the abysmal demographics of the corporate life form.

Why should we be concerned about premature corporate death? As de Geus comments: "The damage is not merely a matter of shifts in the Fortune 500 roster: work lives, communities and economies are all affected, even devastated, by premature corporate deaths." He, too, speculates that the reason for premature corporate death is because management focus is too narrow and short-term, forgetting that the organization's true nature is that of a community of humans in pursuit of a long-term mission.

"Little Bets" Innovation

I just heard author Peter Sims talk on a business news show about his new book "Little Bets." Little bets, he explains, are a low-risk way to explore and develop new ideas. He maintains that most successful people and businesses in vastly different fields use this basic method of making lots of little bets, rather than bet-your-company, big bets. What caught my attention about this interview was that he was describing one of the common factors my research has uncovered in 100 year old companies. To quote from my presentation at the Forbes Business Leadership Forum earlier this month: "These companies ARE innovative, but they do so in a very interesting way: through constant, small experimentation."

These "old" companies are very aware of their changing external environment and are constantly on the outlook for adaptations they may need to make. These companies are tolerant of (and often encourage) activities "on the margin" - experimentation within the boundaries of the firm's cohesive sense of mission and purpose. When large scale innovation and change are needed, they plan and implement it very carefully based on what they have learned from the "little bets."

Sims says in these "uncertain and rapidly changing times .... little bets must become a way to see what's around the corner, or we risk stagnating." Companies that have survived over 100 years have discovered this is the way to survive throughout the times.

Doesn't Leadership Matter?

The most frequent question I receive regarding the common practices of companies that have survived over 100 years is "Why don't you have good leadership as one of the factors?" The simple answer is because it didn't show up in the studies. These companies have survived because of their strategy, culture and practices that transcend individual leaders. Though most of them revere their founder and have stories about leaders who navigated the organization through a crisis of some sort, no common leadership traits emerged. Obviously leadership matters and these companies thrive under good leadership. But they also survive under poor leadership. What they can't appear to overcome, however, is a leader who tries to steer the company away from its strengths rather than building on them: when old companies fail, the leaders have not been following the practices that enabled them to survive for the past 100 years. What a shame.

What You Know vs. What You Do

I am happy to report that my presentation on 100-year-old companies was met with great interest at the recent Forbes Business Leadership Forum/IBM Impact Conference. I was also very pleased to find many examples I could use for the key "survival" practices of old companies from the talks of other speakers at the conference, even though their topics were completely different. IBM started with a slide show titled "100 Years of Innovation in 100 Seconds;" the CIO of Caterpillar talked about the 83 year partnership they have had with IBM; "culture eats strategy for lunch" so you'd better have a good one; Forbes publisher Rich Karlgaard listed "real purpose" (a moral foundation - not financial) as one of the things that are needed for a company to survive in the new economy. One speaker began his talk by asking how many people in the audience believe that regular exercise is good for your health. Of course, most of us raised our hands. Then he asked how many of us regularly exercise. Far fewer hands were raised. His point: knowing what needs to be done is the first step, but doing is necessary and may require changing old habits. The life expectancy of people living in the United States increased by 80% in the 20th century by knowing what factors increase longevity and by acting on them. Now that we have identified some common factors in companies that have "lived" for over 100 years, perhaps in the 21st century we can increase the life expectancy of companies. But it will take changing some old habits.

"My" Old Companies

In preparing my presentation for the IBM Impact/Forbes Business Forum, I've been looking for examples of 100-year-old companies and started with the companies I know best: those I have worked for. Can't believe I didn't realize until now that all the organizations I have worked for in my adult life are over 100 years old. Some of these companies you have heard about: General Electric (1878) and Herman Miller, Inc. (1905), but the small local bank at which I worked throughout high school (The Bank of Birnamwood, now Banner Banks) is also proud of its history beginning in 1900 and not closing during the 'great depression' or after the head teller was killed in a bank robbery. My current employer, little Hope College in Holland, Michigan traces its history to 1851. Perhaps my interest in old companies is rooted in my own positive personal experience with these outstanding institutions.

IBM Impact/Forbes Business Leadership Forum

One week from today I will be presenting results of my research on 100-year-old companies at the Forbes Business Leadership Forum within the IBM Impact conference in Las Vegas. Cindy Cheng from IBM discovered my blog as she was researching IBM's 100th anniversary and invited me to speak at the conference next week. I am very excited to share this information with many of today's business leaders.

Oldest US City - Oldest US Company?

I just returned from a trip to Florida which included an interesting day in St. Augustine. Most people have heard St. Augustine's claims to being the oldest city in the U.S. but how many know what the oldest company is in the U.S.? It could be the King Arthur Flour Company, established in Boston in 1790 and now an employee-owned company out of Vermont. Or - depending on how one counts - it could be Ziljian (the musical cymbal company) which was established by Avedis Ziljian in 1623 in Constantinople and moved to the U.S. by Avedis III in 1929. Run by the 15th generation of Ziljian heirs, it is generally considered the oldest family-owned business in the U.S. I'd love to hear from people who know of other candidates for oldest U.S. company!

Profits: Goal or Fuel?

There seems to be two schools of thought regarding the purpose of a business and the pursuit of profits. The traditional financial management approach teaches that the primary goal of a business is to make money. Many, if not most, business leaders unapologetically state this as their purpose. After all, if you're not profitable you won't stay in business for very long.

Most of the 100-year-old companies, however, appear to have another view regarding the role of profits in their business: they see profits as the fuel that keeps their company running rather than as their purpose or reason for being in business. As Max DePree, former CEO of Herman Miller, Inc. writes in his book Leadership Is An Art, profits are the result of the company achieving its goals. Companies that have survived longer than most tend to define their purpose in terms of what they do and how they do it; and they often admit to making decisions that sub-optimize profits in the short term. But make no mistake, these companies are astute managers of their financial resources. In fact, being conservative in their financial management (evidenced by practices such as maintaining low debt levels and building cash reserves) is one of the common traits that has enabled these companies' long-term survival.

My study of old companies indicates that in these organizations profits are seen as the fuel that enables "living" a long corporate life; core purpose is described more broadly as the value they add to society, not simply the money they make for investors or owners.

1911 Was A Very Good Year

The stars must have been aligned in 1911 to provide the right conditions for company start-ups that last: I mentioned earlier that IBM is in their 100th year. This morning I received an email from my student researcher, who is at a 2-day interview process with Whirlpool, about an announcement at the opening session that Whirlpool is celebrating their 100th anniversary this year (which they call "Countdown to 11-11-11").

It looks like we will have a whole new group of companies to add to our data base - it will be interesting to see what these 'younsters' have in common with each other and whether they differ from those companies established prior to 1900. Companies such as King Arthur Flour, founded in 1790! Headquartered in Norwich, Vermont, King Arthur Flour is now an employee-owned company using open book management methods. They report the qualities that have enabled them to survive - and thrive - for over 200 years are:

• honest enthusiasm and for what they do, which results in earned respect from all those with whom they do business;
• a culture of inclusiveness that empowers everyone in their organization as partners; and
• viewing making money as the by-product or result of doing things well, not the focal purpose of their business.

IBM to Hit 100

While many local companies over 100 years old that I have interviewed are small, often family-owned businesses, a number of large, very well-known companies have been hitting the century mark in the last few years. IBM is celebrating their centennial year in 2011 and I have been invited to speak about my research on 100-year-old companies at the IBM Impact Conference/Forbes Business Leadership Forum in April. It is so interesting to see how a specific company exhibits the common traits that have emerged from the research!