Three Factors That Turn the Lifecycle Curve
Companies are caught by the cycle on their way up, not on the way down. It is when success is celebrated that the virus of arrogance enters the body. When a CEO speaks enthusiastically about "The Company Way" or "Our Recipe for Success," he or she opens the company up for a virus that may be fatal five or 10 years later. That is the virus that turns the direction of the organizational lifecycle.
Three basic factors eventually turn the lifecycle curve for organizations into a death cycle: size, age, and success. Table 1-1 shows how the mechanism functions.
Table 1-1 How Organizations Get on the Downward Track
Before we go into each of the driving forces, think for a moment about your own organization:
- Where do you think your organization is on its lifecycle curve?
- Have you ever heard management discuss this question?
- Are the employees as satisfied as management with the current state of affairs?
- Do customers feel that your organization is as service minded and flexible as management thinks it is?
If your answers to these questions indicate that your organization might need a wake-up call, you are not alone. My experience is that most organizations need it, in particular, those that have grown beyond 100 employees, those that are more than 10 years of age, and those that have been reasonably successful with what they do.
As organizations grow, they tend to become more fragmented. They need more management levels, more specialized departments, more middle managers, more executives, more staff functions, more assistants and support functions, and larger corporate headquarters.
This fragmentation introduces filters between decision makers and where the action is. In small businesses, the owners and leaders know every single customer, small and large. They hear about every single complaint and they also meet satisfied customers that tell them what the customers like about the company. They know every single employee and probably their families. They are close to where the rubber meets the road.
In a larger business, there are departments that take care of every aspect of customer relations: marketing and sales, delivery, customer service, finance, and communication. And most top managers consider their primary role to be managing the whole company rather than interfering with any specific department. Customers become statistics or numbers. Satisfied customers show up as percentages in surveys. Dissatisfied customers are counted as quality costs. Customers’ ideas for product modifications or innovations may be picked up by salespeople, but rarely make their way out of the sales department.
All of this leads to a longer distance between the places of the "real business," where the company meets the customer, and management. Information from the market does not reach management at all, or may only reach management in a refined form—for example, in statistics. In the filtering and refinement process, the essence of information is often lost. In particular, this is because those that do the filtering and processing tend to convey that part of the original information that they believe management wants to hear or see.
As organizations grow older, they develop traditions. It is not only that they conduct the New Year’s reception exactly like last year, which is highly visible. But organizations also develop their specific ways of communicating internally, a culture of conflict handling or avoiding, and a tradition for dealing with new ideas that may be much less visible. Many such traditions are not even recognized as specific to the company—they are just the natural ways we do things around here.
Traditions may be very important, despite the fact that they are invisible. If there is a tradition for lack of communication between the sales department and research and development, one day products will tend to meet the engineers’ needs rather than the customers’ needs. Age gives tradition preference over innovation. And the older the company gets, the stronger the preference for tradition gets.
Success is the most dangerous factor, however, because success inevitably leads to self-satisfaction. The more successful organizations become, the happier they are with the way they currently do things. "The H-P Way" or the "Siemens Spirit" reflects pride and happiness with the way things are. They are mental models that once were successful, but are not necessarily successful any more.
Only rarely do organizations know concretely the true source of their current success. Customer surveys may indicate that superb product design is a strong factor, but in reality, formulas of success are more often a combination of multiple factors that don’t show up in surveys. In particular, soft factors very rarely come up—for example, management style, fundamental company values and their interpretation, or a unique interplay within a group of key people. And long after that unique point has gone away, the organization continues to believe that it possesses the secret key to success. The organization continues to perceive that it is still on the upward part of the lifecycle curve, and it often takes a dramatic crisis to uncover the reality.
Such companies may well show growing sales and profits, but rarely through the dramatic organic growth that once created their success. Mature businesses often enjoy massive positive cash flow from their original (cash cow) core business. These cash flows tend to be spent outside of the core business with the result that the core business is milked to a degree that leaves too little for the ongoing renewal and regeneration of it. Therefore, growth in mature businesses often comes from mergers and acquisitions, and profit goes up because of savings, often following large layoffs. On the surface, companies may look to be successful and healthy even at times when their culture and capabilities are in decay. First generation management that had a passion for products and customers is substituted with a different type of manager that is more financially oriented. In the short term, this may result in higher growth and profits, but long-term sustained growth seldom comes from clever financial management. When finance enters the CEO’s office, passion goes out.
Success always builds on one or more unique advantages for the company: a uniquely valuable or cost-effective product, a unique relation to or control over distribution, or some other factor that creates a type of temporary monopoly.
The company that has enjoyed such a monopoly for some time may make several mistakes without those mistakes having serious consequences. The monopoly has a built-in inertia as long as it continues to be a monopoly. But when the monopoly is lost, which may happen quickly, the consequences of past mistakes add up to rapid decline, which at this point is very difficult to stop. The apparent upward part of the corporate lifecycle therefore usually takes much longer than the downward part, the death cycle.
There are two main components in the ear that allow hearing:
- The three bones that transmit sound from the tympanic membrane in the outer ear to the cochlea, which is the sensing organ in the inner ear.
- The hair cells in the cochlea and the hearing center of the brain, which processes and interprets the sounds.
When the following happens, impairment occurs:
If the ear bones lose connection, the sound is not transmitted and the cochlea gets a poor signal. If hair cells break and the brain forgets its natural routine in interpreting what it hears, even a good signal is perceived as noise.
The organizational structure and the traditions are like the bones of the ear. If they don’t function properly, management gets a poor signal. Culture and misperceptions of the reasons for success are like the brain. If they don’t work properly, management misinterprets whatever signal it gets.
The process of being caught in the lifecycle is similar to the process of losing one’s hearing: For many years, the hearing may actually deteriorate without the person noticing it. And when she actually realizes that she doesn’t hear well any more, she most likely rejects the problem for a decade and blames others for not speaking clearly and loudly enough.
When people lose their hearing, an early stage reaction is to guess what was probably said and answer accordingly. Ask one question and answer another. And when the problem gets more serious, the hearing impaired will listen less and talk all the time.
Companies behave similarly. They think they know what the problem is and they act accordingly. Or they simply stop listening and do more of the things they know best.
Neither strategy works.
In addition, organizations seldom take responsibility for what happens. They tend to blame others for it: competition, currencies, customers, and globalization.
The resulting organizational deafness leads to a behavior that seems to be independent of industry and country:
- Organizations react more slowly to both problems and opportunities.
- Organizations tend to respond by doing more of the same rather than doing something different from what they are used to.
- Organizations maintain a self-perception of success long after success has gone away.
- Organizations reject ideas and solutions that were not invented within their organization’s walls. They consider competitors and customers inferior to themselves. They know better.
- Organizations and their top management develop an increasingly arrogant approach to criticism. Long after they have lost the battle, they continue to act as if they own the world.
- Whatever may be left of entrepreneurial management is substituted by "professional" or financially based management, which believes that key financial figures are its most important tool to run the business.
- Focus shifts from long-term value creation to short-term bottom line. Downsizing, mergers, and acquisitions become the dominating responses to demands for better financial performance.
- The company team spirit changes into a culture of internal competition and friction. Ever more detailed internal accounting systems are introduced to improve financial accountability.
In short, innovation often goes out as financial management moves in. Examples are numerous. Exceptions are few. Think of some from your part of the world and answer the questions in the Food for Thought section at the end of this chapter for each of them. You may also want to perform the more comprehensive self-assessment in Chapter 7, "The Toolbox."