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:
- Longlived companies were sensitive to their environments and constantly adapted to societal changes around them.
- 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.
- Longlived companies were tolerant and did not try to dominate or impose a centralized control throughout the organization.
- 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:
- sensitivity to the environment represents a company’s ability to learn and adapt
- cohesion and identity concerns a company’s ability to build a community and a persona for itself
- tolerance means the ability of an organization to build constructive relationships with other entities within and outside itself.
- 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