Wednesday, April 29, 2015

Survival is the Ultimate Corporate Performance Measure

Following is the introduction to my book, tentatively titled "Survival is the Ultimate Performance Measure: Management Practices of the Business Century Club."  I will be posting chapter excerpts over the next few weeks and would appreciate feedback. Do you think it's worth publishing? Any ideas of publishers who might be interested? Comments and suggestions are welcome.

Most firms do not live as long as they could. Various studies indicate the average life span of companies today is 12 to 15 years. And the lifespan of top companies is shrinking. The average lifespan of companies on the Standard & Poors 500 Index has decreased by more than 50 years in the last century: The average age of S&P500 companies was 67 years in the 1920s but just 15 years in 2013. Experts have posited that the natural lifespan of a corporation could be as long as 200 to 300 years. There are currently 44 members from throughout the world in an organization called the Henokiens Association where membership is based on company longevity (the minimum period of existence is 200 years), permanence (the family must be owner or majority shareholder of the company and the founding family must still manage the company or be a member of the board), and performance (the company must be in good financial health and up-to-date). Even in a country as young as the United States there are a number of companies (well over 1,000) that have survived for more than 100 years. When evaluating company performance in terms of years of existence versus possible longevity, one can’t help but draw the conclusion from these statistics that most firms do not live up to their potential.

A premise of this book is that a fundamental objective of the firm, though often unstated, is survival. Profits are necessary for survival, but they are not the ultimate goal of a business –think of profits as the fuel that keeps a company’s engine running, not its destination. Or, as Arie de Gues explains in the prologue to his book The Living Company:

“Like all organisms, the living company exists primarily for its own survival and improvement, to fulfill its potential and to become as great as it can be. It does not exist solely to provide customers with goods, or to return investment to shareholders, any more than you, the reader, exist solely for the sake of your job or your career. After all, you, too, are a living entity. You exist to survive and thrive; working at your job is a means to that end. Similarly, returning investment to shareholders and serving customers are a means to a similar end for IBM, Royal Dutch/Shell, Exxon, Procter & Gamble, General Motors, and every other company.”

Why be concerned about corporate longevity? Gary Hamel, who the Wall Street Journal has ranked as the world's most influential business thinker and Fortune magazine has called "the world's leading expert on business strategy," wrote in his WSJ blog that when companies die prematurely it is to the detriment of society at large. His point is that time enables complexity and that organizations grow and prosper by turning simple ideas into complex systems. And the process of turning inspiration into value takes time, proceeding as it does through iterative cycles of experiment-learn-select-codify. If poor executive decisions prematurely interrupt this process, a society may lose the benefit of the original idea – as well as others that it may have engendered. This isn’t an argument to insulate a company from failure, he says, but rather a reason to “imbue organizations with the capacity to dynamically adjust their strategies as they pursue a long-term mission.”

Hamel points out that corporate failure often means the collapse of an entire ecosystem, a point also made by de Geus:“The damage [caused by the premature death of a company] 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. There is something unnatural in the high corporate mortality rate; no living species, for instance, endures such a large gap between its maximum life expectancy and its average realization. Moreover, few other types of institutions – churches, hospitals or universities, for instance – seem to have the abysmal demographics of the corporate life form.”

de Geus’ conclusion is that companies die prematurely because managers focus exclusively on the economic activity of producing goods and services, forgetting that an organization’s true nature is as a community of humans. In the words of Ian Davis, former managing director of the multi-national management consulting firm McKinsey & Company: “Corporate endurance should not be an end in itself. That said, in a very real sense, survival is the ultimate performance measure.”

What enables some companies to defy the odds to continue operating for a century or more while others succumb to an early death? In general, businesses are overwhelmingly small- and medium-sized enterprises and privately-owned – both over 95 percent, according to the U.S. Census Bureau. Previous research on corporate longevity has been conducted on large, mostly publicly-owned companies with very small sample sizes (Collins & Porras, 1994; Pascale, 1990; Hall, 1997; de Geus, 1999; Grossman & Jennings, 2002; Stadler, 2007; Kwee, 2009). For this reason, the research I embarked on with my Japanese partner Makoto Kanda focused on small- and medium-sized, privately-owned firms. If we wanted our research to be useful to companies desiring to thrive for the long run, the practices needed to be relevant to their situations.

The longevity practices described in this book are based on ten years of research in both Japan and the United States. The work started by conducting case studies on several old companies in Japan and the United States from which we built a theoretical longevity model. This model describes the practices the case study companies said led to their survival for over a century. To test the theoretical model, a survey of 125 questions was developed based on its key factors. This survey was administered to 90 Japanese companies over 100 years old. Survey responses confirmed that old companies believed the practices described in the theoretical model were important factors in their longevity. The survey was then administered to the 7,000 companies in the Chuo Ward of Tokyo, Japan – both old and young – to see if the behaviors described in the longevity model were a unique approach to business used by old companies. A number of statistically significant practices of old companies emerged from this research.

When presenting the results of this research at academic conferences, the question most often received was whether these behaviors were unique to Japan: was the longevity model really just a Japanese business model and not something that would work in the United States or other economies? After taking several years to construct a data base of U.S. companies over 100 years old[1], we were able to test the theoretical framework for its relevance in the United States: the same survey was translated into English and sent to U.S. companies over 100 years old. Not only did the results of this research confirm that the longevity model was valid in the United States as well as Japan, old U.S. companies indicated that many of the significant practices were even more important than did their Japanese counterparts.

It should be noted that, though these practices correlate with companies in business for over a century and many of them are distinctive when compared to those of younger companies, they cannot be said to be causal: I cannot say that implementing these practices alone will guarantee your company’s survival for the long run. And, just because the practices are statistically significant, this does not mean all old companies exhibit all of the practices described.

Though I don’t want to bore the reader with a lot of academic research terminology, I do want to give assurance that the longevity practices described in this book are not just my ideas for better business management – they are based on objective research. I readily admit that these practices do coincide with my beliefs about how business should be conducted, which is likely why I became so interested in this research line. However, it is worth noting that the behaviors described in the longevity model are also reflective of some recent 21st century management theories such as stakeholder theory (defined as “obtaining a competitive advantage through the development of close-knit ties with a broad range of internal and external constituencies”) and that of shared value (defined as “the policies and operating practices that enhance the competitiveness of a company while simultaneously advancing the economic and social conditions in the communities in which it operates”), which has been called the next evolution of capitalism. These old companies that have thrived for over 100 years have been successfully practicing a way of doing business that creates shared value and enables their own survival long before it was proposed as an evolution of capitalism.

It was only once I began preparing a presentation for IBM on their 100th anniversary that I realized every job I ever had was with a company that was over 100 years old. So perhaps it was my own work experience that formed my beliefs about the role a company should play in society. Regardless of the source of the ideas regarding this integrated approach to managing a business, I am happy to say the research confirms that the practices that are good for all stakeholders are also the ones that enable an individual firm’s survival.

[1] I wore out several student researchers in the process of compiling this data base: special thanks go to Elizabeth Cohen, Kurt Goldsby, Alison Meshkin, and Katelyn Rumsey.

No comments:

Post a Comment