The Lifecycle of Corporations - Management Portal

top

themanager.org

Home

Publications

German Portal

Bookstore

Feedback

Submit an article

Thoughts on the Lifecycle of Corporations

By Dagmar Recklies

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. 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).

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 their opportunities were equal.

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 he relatively low number of very old corporations is that companies – like products and markets – have a life cycle and hence, a temporary life span.

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:

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 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.

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.

>> continued on page 2 >>

---------------------------------

More information on this topic

Knowledgebase - Management - Crisis Management /Turnaround Management
Knowledgebase - Management - Change

Also have a look at our Strategy Bookstore