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25.04.07

Life-cycle of companies

Irving Wladawsky-Berger reflects about his time being with IBM.

Reflecting perhaps a somewhat morbid point of view, I am particularly fascinated by the number of once seemingly powerful companies that are no longer around. It is as if, like living organisms, a business is destined to disappear sooner or later, and a very large part of innovation and strategy is all about how to avoid the inevitable death of the organization. In the book she co-authored, Let go to Grow: Escaping the Commodity Trap, my colleague Linda Sanford cited a study demonstrating that of over one thousand companies tracked by the Fortune 500 since 1960, less than one sixth of them are still around.

Generally I think, it is difficult to accept that admirable companies today most probably won’t be around anymore in 30 to 50 years. Especially, for those that are working in such an environment. However, as Richard Pascale pointed out, highly successful companies are especially in danger to sink. One of the reasons may be inertia, another one may be blindness (due to success) - of course, many other factors are contributing.

In this context, I find Charles Handy’s illustration of the sigmoid curve very helpful to explain the reason for this company life-cycle:

The graph sums up the story of life: starting slowly, growth and then waning. However - as opposed to biological life, there is life beyond the curve. The secret to constant value creation is to start a second curve before the first one matures (point A). Unfortunately, most companies only start when looking disaster in the face (point B). At this point in time, it becomes much more difficult, since leaders are already discredited, energy is low and resources are depleted. Now, often a new leader comes into place expecting him to rescue the sinking ship. Though, they also start with a demotivated crew (the best employees left already the company), scarce resources and not much freedom to manoeuvre.

In his own words, Handy states:

I carry that to extremes and say every organization should assume it is at the peak of its particular S-curve - either product or life cycle - and it should create a new and different life cycle. I call this the second curve. To accomplish this, companies must constantly explore different directions. Most don’t do it particularly well until it’s almost too late. I don’t know any that do it continuously.

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