Thursday, April 30, 2015

The Corporate Longevity Model

Based on in-depth interviews and subsequent surveys of companies in business for more than one century, five factors were identified that these companies believe are important to their long-term survival. Leaders of the companies say these practices build loyalty to their company, in particular with customers and employees. They also believe their approach to doing business is difficult for others to imitate, thus aiding their firms’ ability to stay ahead of the competition. Following are brief descriptions of the five factors which, taken together, form the longevity model. Subsequent posts will describe these factors in more detail along with the unique practices employed by old companies. Though each factor will be described individually, please keep in mind that the leaders of the old companies were adamant that the factors must be implemented together if they are to sustain a firm for the long run.

Factor 1: Strong corporate mission and culture
The existence and deliberate transmittal of certain values and beliefs that form a strong corporate culture was considered a key survival factor by the old companies. Most companies had values that were developed by the founder and passed on through the generations. Certain lessons, warnings, and exhortations are described in these teachings. Though the style and content differed from company to company (for instance, not all firms had written mission or values statements), current leaders consistently affirmed the importance of their corporate credo as a primary factor in the success of their businesses. These traditional values and beliefs formed the fundamental culture of the company and are used both to enhance employee identification with the business and to attract and retain customers. Leaders of these old companies see themselves as stewards or custodians of the business and feel an obligation to manage the firm in a way that both honors the past and ensures its survival into the future. This deliberate focus on continuity of the business, rather than making a name for themselves, results in real differences in the way old companies are managed.

Factor 2: Unique core strengths and change management
The existence and protection of a particular technical specialty or core competency was a factor the old companies said was a key to their longevity. These company ‘secrets’ or special methodologies are believed to make the organization and what it offers unique. The old companies indicated the ongoing development of their special capability was also necessary. The image of old companies is often that they stick to tradition and resist change. The reality is that they adapt and successfully implement change or they would not have survived the many challenges encountered over the centuries. Long-term survival comes from continuous efforts toward change while protecting and building on core strengths – a delicate balance between tradition and change.

Factor 3: Long-term relationships with business partners
Relationships are at the core of how the old companies operate. These firms regard the maintenance of long-term relationships with customers and the development of their suppliers from generation to generation as very important to their own success. These companies truly believe they cannot maintain their success for a long period of time without this web of interdependence. The emphasis on relationships with business partners moves beyond mere economic transactions or the exchange of goods or services for financial gain, and the resulting close-knit, mutually-supportive relationships have a significant effect on the company’s ability to weather challenges as well as their ability to learn and adapt over time.

Factor 4: Long-term employee relationships Relationships are at the core of how old companies operate and the development of long-term relationships with employees is another keystone factor in the longevity framework. Many employees become lifelong, loyal members of the organization and often describe their relationship with the company as being part of a family. One of the important employee practices used by the old companies is the development of leaders from within using a deliberate process for leadership succession. A majority of these firms have already identified who will be their next leader.

Factor 5: Active members of the local community
Because the old companies see themselves as an integral part of a web of relationships (often connected to their family history and reputation), the development of relationships within the local community – both commercial and social – are seen as just as important as the development of relationships with business transaction partners. The old companies tend to be active participants in their local communities, promoting the community and developing local networks for mutual learning and benefit. They believe these connections with people in other industries at all levels of management have a positive influence on the reputation of their firm. They also believe there is a positive influence on their business that comes from the local community’s good reputation. As a result of recognizing the value provided by the society beyond their individual business or industry, the old companies invest time and resources in projects that develop and sustain their communities.

Some of these longevity factors have been described by others, such as Collins and Porras’ in their book Built to Last, Arie de Geus’ The Living Company, and Christian Stadler’s Enduring Success. However, all these studies were done on very large, publicly-owned firms. This longevity model draws most heavily on small- to medium-sized, privately-owned firms. (Though some of the companies researched were publicly-traded, they tended to be closely held with family members often involved in the company.) The last factor, community involvement, is unique to this study and, we believe, a key factor in the ability of these old companies to thrive for over a century. And it bears repeating that the old companies believe their longevity comes from the interaction of all five of these factors and the strength and endurance resulting from the interaction.

As the Henokiens Association says in the description of their organization of companies in business for over 200 years: "The specific characteristics of these old companies’ respective backgrounds and the common values which unite them – such as respect for product quality, human relationships, know-how transmitted with passion from generation to generation, and the continuous questioning of achievements – all constitute a message of hope for all businesses, especially those hoping to form the economic and social fabric of the future."

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.

Tuesday, April 28, 2015

Management Practices of the Business Century Club

How I Got Interested in Old Companies

After over 25 years in business, the last decade as an executive in a $3 billion international company, I began my second career as a college professor at the start of a new millennium. I looked forward to trying to guide future business leaders into seeing the role business plays in building our society, for better or worse, and how – by becoming competent, caring business professionals – they could help the companies they join (or start) to be positive contributors to society as a whole, not just to the owners or investors. I have loved my interactions with students and the role of college professor. However, I didn’t realize at the time I made this transition that performing the work of a college professor as a real career (as opposed to an avenue to ease into retirement) meant that in addition to teaching I needed to do scholarly work.

My first attempt at writing a paper for an academic conference followed that of many other former executives: pontificating on my beliefs about leadership. That paper, titled “Everyday Leaders” (which I later discovered is not an appropriate title for an academic paper – it’s way too short), actually received more attention than I could have hoped for: it was accepted for publication and was later picked up and quoted by The Futurist and Training magazines, among others. Having built my case for the importance of good, everyday management I didn’t have much more to say about that topic and found myself a little at sea as to how to proceed to build a real scholarly agenda.

So it was my good fortune that the professor who was supposed to lead our school’s Japan May Term in 2004 had to withdraw and our international education office was desperate to find a substitute. Ever since backpacking through Europe between my junior and senior years in college I have loved traveling to other countries and learning about different cultures, so I readily volunteered to step in. Hope College has had a decades-long relationship with Meiji Gakuin University in Tokyo – in fact, we are celebrating 50 years of exchange programs in 2015. This relationship enabled our May Term in Japan to be much more than travel and touring, since we spent most of the month in Tokyo taking in lectures from various MGU professors. One such lecture was given by economics professor Makoto Kanda on his work studying shinise, which are very old and honored Japanese companies, or “old shops of long standing.” I was fascinated by his presentation: the common characteristics he described in many ways echoed the beliefs I had regarding how businesses should be run. Here, potentially, was proof that my ideas weren’t impractically idealistic, even though the practices he described weren’t necessarily what is taught in business school.

Several of the oldest known continuously-operating companies in the world are Japanese, with seven having been founded prior to 1,000. In analyzing a database of Japanese companies over 100 years old, it is evident that firms do not have to grow large in order to survive. In fact most shinise are small- to medium-sized, private (often family-owned) businesses. This revelation is especially interesting considering how ingrained is the maxim of “grow or die” in our modern management theory.

I could not stop thinking about Mako’s presentation, and several questions came to mind. How unusual is it for a company to live to be 100 years old? If it is rare, how have some companies managed to beat the odds? Are there any secrets to corporate longevity we could learn by studying the management practices of the old companies? Since Japan has such a concentration of old companies, how culturally specific are these behaviors? Would old companies in the United States exhibit similar practices? And so on.

I had found my research agenda.