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.