Archive for November, 2009

Why do so many companies die prematurely? 4 key factors

November 29, 2009

In his book “The Living Company” first published in 1997, a former senior executive of Shell, Arie de Geus, asked one simple question: why do so many companies die prematurely? A key contributor to business strategy at Shell, de Geus was investigating how to diversify the activities of Shell, knowing that its core business, petroleum,  in the long term would disappear. When he investigated what other companies were doing to ensure their long term future, he was startled to discover that there were few companies of the size of Shell who had the same or a longer lifespan.

The figures presented by de Geus on the subject of company longevity are indeed depressing. The average life expectancy of a multinational company  is between 40 & 50 years. One third of companies listed in the 1970 Fortune 500 had vanished by 1983. Human beings at least in the developed world now enjoy a life expectancy of 75 years and more yet companies have a mortality rate which is much higher. Indeed, if large companies can somehow hope to survive at least 40 to 50 years, this figure falls dramtically if you consider all companies big and small. De Geus quotes a study performed in Holland where the life expectancy of all firms investigated was calculated as 12,5 years!

The current crisis with the failures of institutions such as Lehmann Brothers (initially founded in 1853!) and the virtual bankruptcy of General Motors  makes the question of company mortality rates all the more relevant today.

When you consider all the social misery that such high levels of corporate mortality bring, it seems important to try to understand why so many companies fail and why some seem to survive despite all the political, social and economic upheavals around them. So why do so many companies fail? For de Geus, the reason is that their managers focus on the economic aspects of producing goods and services and they forget that their organization’s true nature is that of a community of humans!

Some companies nevertheless indeed last hundreds of years and de Geus gives examples such as DuPont, Kodak, Sumitomo, Mitsui and Daimaru. In France, Saint-Gobain has been around since 1665! So if you want to understand what is the secret to corporate longevity, study those large companies which have the longest lifespan to see what secrets they share.

De Geus identified 40 companies who were as large as Shell and older. After much analysis, he identified 4 key factors shared by all companies with a long lifespan:

  1. Longlived companies were sensitive to their environments and constantly adapted to societal changes around them.
  2. Long-lived companies were cohesive with a strong sense of identity. No matter how diversified they were, their employees felt they were all part of one single entity. It would appear that strong employee links is essential to survival in times of change.
  3. Longlived companies were tolerant and did not try to dominate or impose a centralized control throughout the organization.
  4. Longlived companies were conservative in financing, were frugal and did not risk their capital gratuitously. They managed cashflow wisely to maintain flexibility and independence.

What does this mean for managers running businesses who are fighting to deliver short-term results while guaranteeing the future?

De Geus defines the 4 factors in the following ways:

  1. sensitivity to the environment represents a company’s ability to learn and adapt
  2. cohesion and identity concerns a company’s ability to build a community and a persona for itself
  3. tolerance means the ability of an organization to build constructive relationships with other entities within and outside itself.
  4. conservative financing means the ability to govern its own growth and evolution effectively.

These 4 basic components: leaning to adapt, building a community with a shared purpose, building constructive relationships and being able to govern one own’s growth form a set of organizing principles of managerial behaviour and represent the critical aspects of the work of any manager who wants his or her company to survive and thrive for the long term.

But these 4 components can only flourish if we operate a paradigm shift and change the way we think of a company. For de Geus, a company is a living entity and not just a machine built to deliver products and services or satisfy customer or shareholders.

Anyone who has worked in a business would not be surprised with such a view of an organization. Organizations need to learn, all have an identity, all seek to guarantee their coherence, all build relationships with other entities and all grow and develop until they eventually die.

Considering a company as a living entity has important implications for answering another key question: what are companies for? According to the dominant paradigm in business, a company’s purpose is to deliver products and services, to serve customers and deliver ROI to shareholders.

De Geus anwers this question in a far more provocative way. A company, like all living entities, exists for its own survival and improvement : to fulfill its potential and to become as great as it can be. Just like a human being who doesn’t exist solely for his/her job or his/her career but seeks to survive and thrive, to realize his/her potential.

Profit, return on investment are a means to an end but not the end in itself. The end in itself for a company is simply to grow and thrive.

The implications of defining a company’s purpose in this way for managers and management practice are fundamental and far-reaching. If we accept that the purpose of a company is simply to survive and thrive, then the priorities in managing such a company are very different to those set forth by the champions of the dominant paradigm which sees a company’s purpose only as to deliver short term results.

Those companies with the longest life span would seem to have understood that their real purpose was to survive and thrive in the long term and they consequently managed their businesses around that goal.  In the present crisis, with so many companies going to the wall, it would be well worth rediscovering the views of Arie de Geus and investigating more deeply how we can benefit from the lessons and management best practices of the tercentenarian companies who put the sense of community first.

For more information, read Arie de Geus,  “The living company, Growth, learning and longevity in business“,  1997

arie de geus on organizational change

The Pygmalion effect: expect the worst and we most likely will get it!

November 11, 2009

We have all heard of the “self-fulfilling prophecy“. One way to look at this idea is to say that “we get what we expect” and if we expect something to happen, our expectation will tend to make it so.

Our expectations often drive the events which occur, rather than the other way round. A leading researcher on this issue, Robert Rosenthal, labelled this expectancy effect the “Pygmalion effect” and if we are not all familiar with the Greek myth of Pygmalion, the sculptor, who fell in love with his own statue of a woman, many of us have seen the movie My fair lady, inspired by the George Bernard Shaw play Pygmalion, where Professor Higgins sets out to transform a girl of modest origins, Eliza Doolittle, into a lady.

Rosenthal has researched this issue for many years and has come up with some interesting findings. In particular, he performed a study at an elementary school in a lower middle-class neighbourhood of a large US town. This experiment has been called the Oak School experiment. Simply put, with the agreement of the school administration, all the children in grades 1 to 6 were given a standard IQ TEST at the beginning of the school year. The teachers were told the test was the Harvard Test of Inflected Acquisition and that the test was designed to predict academic blooming. In other words, teachers were told that students scoring high on the test were ready to bloom academically and would progress in the coming year. If the test was a valid one, all the rest was not true and the test had no predictive nature whatsoever.

All the teachers subsequently received a list with the names of their students who had scored in the top 20% on the “Harvard Test”. Of course, the names provided were at random and the children in question had done no better than the other pupils forming part of the control population.

Near  the end of the year, all the children at the school took the test again and the degree of change in IQ was calculated for each child.  To summarize, the results showed that the children for whom the teachers had expected greater intellectual growth averaged significantly greater improvement than did the control children.

Rosenthal explains the differences in terms of teachers expectations. When teachers expect greater intellectual development from certain children, these children did show greater intellectual development.

Rosenthal defines 4 key factors which drive this Pygmalion effect:

1) Climate factor: teachers who expect more of certain students tend to create a warmer climate for those children, both verbally and non verbally (for example, they will smile moe often at them).

2) Input factor: teachers will tend to teach more material to children they think are smarter

3) Response opportunity factor: children who are expected to bloom academicallly get more chance to respond.

4) Feedback factor: if more is expected of a child, he/she gets praised more when he/she is right but gets more differentiated feedback when he/she makes a mistake. Children who are not expected to perform get less feedback when they are wrong because teachers would seem to think that the children in question would not understand the correction and so the teachers spend less time trying to correct them.

If you transpose these findings to the world of work, what conclusions can be drawn for high and low performers?

Obviously, managers have to question their role in generating performance through the expectations they develop in relation to different employees. If they expect more from certain employees (for example, those who have gone to certain universities or grad schools), their expectations will tend to drive the results they expect because they will create the climate, give more input, be available to listen more and above all give more differentiated feedback to help the employee for whom they hold high expectations.

On the other hand, they will tend to spend less time maintaining a favourable climate with workers for whom they have less expectations, give less feedback, make themselves less available to listen and finally, give less differentiated feedback to employees they deem to be struggling or not able to understand the feedback that is required to hep them progress.

In other words, some managers get the performance they expect and either consciously or unconsciously, adopt behaviours which may drive success for some but also drive failure in others.

The manager’s role is to drive better performance in all and so everyone in a management role should be alert to the Pygmalion effect and how preconceived notions and bias can perhaps deliver high performance in some (the so-called stars or A-players) while driving poor performance in others.

Simply put, if you are in a management role,seriously question your preconceived notions about team members. Be alert to how you behave towards all team members in terms of the climate you establish, the input you give to each team member, the response you give to each person in terms of support and coaching and how you give differentiated feedback to all. If you truly believe in team work and how 1+1+3, then you need to focus on how you can get more from all employees through higher and more positive expectations focused on all.

To conclude, the bad news is that our expectations as managers toward employees can drive both good and bad performance.

The good news is that we can drive good performance in all team members if we adopt the correct behaviours and if we have positive expectations for all team workers.

If poor expectations drives poor performance, positive expectations can and will drive good performance. Positive expectations are the key and this means trusting your employees more to deliver to your higher expectations. People will deliver more if you expect them to do so. Higher performance is a case of Greater expectations aimed at all employees be they Harvard graduates or employees of more humble background.

Check out the video which features Robert Rosenthal discussing the Pygmalion effect.

The Pygmalion effect

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