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Thoughts on the Lifecycle of Corporations

By Dagmar Recklies 

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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: 

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, 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.

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.

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.

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 observe 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.

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More information on this topic

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

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