Thoughts on the Lifecycle of Corporations

Presumably, a description of all existing companies by age would look similar to a typical population pyramid (without latest effects of excessive aging of populations in some economies). Experience shows that the time span of successful corporate activity is not endless in most cases. Of course, there are many corporations with a history of 50 years and longer. Nevertheless, the number of companies – no matter what size – that have been existing for 100 years or even longer is much smaller.

Is it possible that corporations have a lifecycle, just as products and markets?

analogy of corporate lifecycles and a population pyramid

Corporatoins have lifecycles – leading to many young and few very old ones

First explanations

At first sight, there are some straightforward explanations for this phenomenon:

The population was lower than today in most developed countries 100 years ago. Accordingly, less businesses were set up that could still exist today.

Another potential reason might be that businesses got into trouble easier since management science and management education were not as developed as today. However, similar as today, all businesses had access to the same body of managerial knowledge so they had equal opportunities.

Neil Perkin highlights another aspect of the life expectancy of companies. He references research data that shows a shrinking life expectancy of large companies:

“Whilst human lifespans have increased markedly since 1950, say BCG, company life expectancy has almost halved.”

The following thoughts on the specific problems of aging organisations are general observations and trends. They do not rule out the possibility that some companies might develop differently.

It is my opinion that one important reason fort the relatively low number of very old corporations is that companies – like products and markets – have a life cycle and hence, a temporary life span.

How corporate lifecycles end

To develop this hypothesis, I will start with a discussion of the various ways how corporations can come to an end:

  • The most common situation in which a company involuntarily exits the market is that of serious problems with profitability that lead to illiquidity and / or over-indebtedness which makes it impossible to stay in business.
  • In some cases the owners decide to liquidate the business without economical pressure. This is often the case with special purpose vehicles which were set up only for a particular purpose with a pre-defined end (e.g. real estate development projects).
  • Often companies are merged into a new entity with the result that they no longer exist in their original form. Typical forms are:
    • Splitting up into several economically and legally independent entities. This is often the case with highly diversified organisations in which the business units have little potential for synergies.
    • Merger with other companies. The merger of two or more companies leads to a new entity, although with older roots. An example is the merger of Rhone-Poulenc S.A. and Hoechst AG to Aventis S.A.
    • Acquisition by another company, which is followed by integration. In the case that all major functions and systems are integrated into the acquiring organisation (or a sister company) the acquired company will actually go down, even if the legal shell or the brand might continue for some reason.

All three forms of transformation into another entity are ultimately caused by the fact that the owners or the market expect a value added from the new arrangements. In those cases, the whole (organisation in its old form) is of less value than the sum of its parts.

Hence it seems to be difficult to lead a corporation in such a way that its continuation is the preferred option for all stakeholders over long times. Much has been researched and written about what makes companies fail. In summary corporate failure may be put down to the following reasons:

Why companies fail

Management mistakes

Management mistakes are a frequent cause of corporate breakdowns. Wrong management decisions can doubtlessly make every organisation fail, even young and successful ones. Even if there are many publicly noted management mistakes in large companies, it can be argued that this phenomenon is even more common in small and medium sized businesses. This may start for instance with serious misjudgements of market potentials, attractiveness of location etc for start-ups. It goes on with commercial mistakes like poor cash management and calculations and many more. In view of these examples, the earlier assumption that in former times more companies failed due to insufficient managerial knowledge and skills may be assessed as wrong.

Problems with the management of growth

Problems with the management of growth are another turning point in the lifecycle of a company. All types of growth will require the company to adjust its systems, processes and ways of doing to the new size sooner or later. Larry E. Greiner describes the various problems associated with growth in his model of Five Phases of Growth, which all lead to a particular type of crisis:

Phase Growth through Crisis of
1 Creativity: In this early stage, there are only few people in the company. They know each other well and share their experience, knowledge, and information. All relevant issues are discussed among all people. This is the typical creative start-up culture. Leadership: As the company gets larger, it gets increasingly difficult to do everything in a mutual effort. They have problems to distinguish important from unimportant issues, since there are few or no organizational structures that allow allocating work to certain persons. The company needs a strong leader who holds the team together and establishes appropriate systems and structures.
2 Direction: Now the company is able to direct certain issues and tasks to certain people. Normally, directives and control are highly centralized at this stage. Autonomy: If the company continues to grow, this leads to an extremely high workload for the manager or the management team. They have to handle nearly everything in the company. They are responsible for assigning tasks, controlling results, acquiring work, solving problems, motivating people etc. As the company reaches a certain size, management will not be able to continue this way. They have to give up some of their autonomy and to share some tasks.
3 Delegation: Management delegates some tasks, functions and authorities to other people in the company. Departments emerge and develop their own dynamics. Control: If management now fails to control the activities of these departments, they would start to handle tasks more from their own view than with the whole business in mind. At its extreme, departments would work against each other.
4 Co-Ordination: Projects and tasks are coordinated between all parts and departments of the company so that they are well in tune with each other. Red Tape: This coordination can lead to a high level of bureaucracy. Fine-tuning requires high efforts that make it difficult for the company to adapt to changes in the external environment.
5 Collaboration: The co-operation between all parts of the company is so well organized that they really can work together effectively in whatever situation. ?: Nevertheless, doing business is never easy and the next crisis is waiting for sure.

 External changes

Besides that, companies often have problems to adjust do external changes and a dynamic environment. There are plenty of well known examples for companies that got into a severe crisis because they were not able to react in time and / or appropriately to various changes, e.g. in customer preferences, competitive mechanisms or technologies.

Neil Perkin highlights rapid change and disruption as a challenge that many businesses may fail to master:

“…perhaps the real story is less about the impending death of large businesses and more about their need to adapt – to move through business and product life cycles more quickly than before, to be more focused on systematic experimentation and organising swiftly around opportunity.”

This last issue – the lack of ability to adjust to external changes – is very common for companies with a long history, no matter if large or small:

Typical differences between younger and older companies

Younger companies

Companies in their first years of existence or in phases of dynamic growth often have a more flexible mindset. A large proportion of management and staff are fairly new in this organization. They all bring in experience from a variety of other jobs. Their relationship to the corporate culture and the ways of doing things here is still not so strong. Hence they are more prone to questioning things and to abandon old habits in favour of a better solution.

Such companies are still aware of how it feels to establish a good competitive position from scratch. They are used to fast decision processes and they are willing to accept changes. In many cases, systems and processes are simple enough to allow for easy modification to fit a new situation.

Younger companies still don’t have a comfortable market position or they acquired on at the expense of an established competitor only just a short time ago. Thus they are aware of their vulnerability and accordingly are more sensitive to the developments in their environment.

Older companies

Older companies, however, have different characteristics. Many of them have developed a strong culture over time. They may even have survived some crises. Such companies have a higher proportion of employees who are with that company for long years. Without doubt, this has some advantages. However, it also makes it more difficult for these organizations to remain flexible and dynamic.

They tend to overestimate their strengths. Their pride in the achievements and the decades of nurturing the basis for these achievements may make very difficult for them to realise the need for change. The ‘not invented here’ attitude and the ‘we have always done it this way’ attitude are typical indicators for such problems. More over, such companies are prone to form a common understanding of their business model and their market. This self-perception can become so strong that people in the company interpret all external changes in a way that makes them fit to their common understanding. Thus, they are not able to identify early warning signs.

Excursus: The arc of enterprise

Richard Rumelt describes a similar phenomenon in his book Good Strategy / Bad Strategy. He writes about the downsides of strategic resources. Strategic resources are – in Rumelts words – a kind of property that is fairly long lasting and that has been … developed over time, … and that competitors cannot duplicate without suffering a net economic loss.

Typical examples are patents, brands, or exclusive access to scarce input resources.

Such a long lasting resource position produces reliable profits for a long time without great effort. The efforts and expenses were already incurred in the past, when the resource was developed.

Rumelt reminds us that it is human nature to associate current profit with recent actions – even for such strategic resources. Managers will happily refer to their leadership skills, considerate actions and strategic foresight in relation with the company’s successful development. They may actually really believe in that.

This misjudgement opens the door for laxity. Managers who are convinced that they are doing everything right neglect the need for adjustments. They neglect the fact that even the most stable strategic resource will eventually come to an end. They fail to build the foundation for new future strategic resources.

Success leads to laxity and bloat, and these lead to decline.

Organizational structures: Various departments have become fairly large and specialised. This makes internal communication more difficult. For instance, managers in controlling and marketing might identify some warning signs. The engineers in R&D and production, however, might be convinced that alone their creativity and ability to develop ever new and better products (which was the basis of success so far) will be enough to secure the future.

Systems are another issue. Companies develop complex and stable systems over time. Each of us who has ever tried to integrate a new line of business into an existing SAP system knows the problems that may arise from that. The system will probably become even more complex. Other examples for such systems are specialised production facilities, established customer relationships, manuals that have grown to the size of Encyclopaedia Britannica or informal networks among employees. All such systems are not easy to change. They may even hinder change.

Hence, older companies are more than younger ones inclined to continue with their established systems, processes and ways of doing things. They tend to try to solve upcoming problems by optimising and intensifying whatever made them successful in the past. Younger companies are more willing to question hitherto approaches.

Age does not need to lead to failure

Of course, companies will not necessarily fail as soon as they reach a certain age. Many companies successfully revitalise themselves, even for several times. A good means to avoid such problems of aging is to systematically fill key positions with new people, ideally from outside the organisation. Depending on the particular situation of the company, it is essential to find the best mix of experienced and young staff, or of veteran company insiders and new outsiders.

It is possible to overcome crises and to rejuvenate the company while doing so. Because of the hinderers for change discussed above, it is often necessary to create a crisis in order to initiate change and to create the acceptance for change.

The role of legacies

However, despite all reinvention and rejuvenation, there will normally remain some remains from the old systems, structures, styles and processes. They will continue to have an effect on the organisation. Moreover, organisations can successfully cope with only so many change initiatives. This is even more the case if they come too frequently. If there is too much change, it will eventually do more harm than good.

  • Too many changes in the management team do not allow management and the whole organisation to adjust to each other and to develop efficient ways to work together.
  • Larger change initiatives tie up significant personal and financial resources and thus have very high priorities. This leads to the risk that the organisation is more concerned with itself and with its change than with the market and to customers.
  • Often it is not possible to totally change major systems such as IT or controlling. Hence, these systems are only adjusted and modified. These modified systems are only second best compared to a new system that was tailor-made for the new situation. Such systems tend to become overly complex, inefficient and very difficult to handle after several change processes.
  • Too many and too frequent change initiatives can cause resistance among the employees. This eventually leads to dissatisfaction, lack of commitment and in the worst case to the loss of key employees who seek a more reliable work environment elsewhere.
  • In the course of frequent changes, the organisation may lose its identity. The old corporate culture did not fit any more and was abandoned quickly. It takes time, however, to build a new culture. Until than, people in the organisation lack orientation. Moreover, frequent restructurings can destroy the positive aspects of informal networks. If managers and specialists on all levels are put into new positions frequently, it becomes more and more difficult for them to understand the scope of their new jobs and to identify important contact persons. This can seriously damage internal communication and knowledge sharing.
  • Organisations can virtually get used to frequent change. For some of them, this adaptability becomes a core competence and a source of competitive advantage. However, as long as the successful change is only a reaction to something in the environment, the organisation may easily lose its focus on targeted actions that might change the environment and may lead to much larger advantages.

Hence, you could argue that companies only gain some time with each change initiative, so that they can put off the next problem and extend their lifespan. Of course, this time could be a decade or even a century.

Following this theory, the more frequent alteration between boom and crisis which we can witness in so many companies today, is not only due to the more dynamic external environment. Many companies lose their ability to advance efficiently for the reasons discussed above. In such a situation it might indeed be the best option if the company is merged into something new by spin-off or acquisition.

Our book recommendations on corporate lifecyles

  • Managing Corporate Lifecycles (How Organizations Grow, Age & Die)
    By Ichak Adizes Ph.D. Courtship, Infancy, the Wild Go-Go Years, and Adolescence. These are the stages every company goes through to reach what Dr. Adizes calls PRIME. In these critical early phases of company development, he shows you how to anticipate and handle typical problems then quickly move on and up.
  • Aligning Corporate Lifecycles and Product Lifecycles
    By Dr. R. N. Givhan In the development of products we tend to segregate the actual position of the corporation and the products, while we should considered both. In a clear evaluation of where the corporation is and where the portfolio is management can determine points of product development needs and market penetration.