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Why Companies Grow, Age And Die

Companies go through stages in their life cycles, each requiring
different management approaches.

Material handling organizations have life cycles just as living organisms do. They are born, grow, age and die. They go through the normal difficulties accompanying each stage of the life cycle and face the problems of moving to the next stage.

Young organizations are flexible. “We used to commit 80 percent of our resources during breakfast,” one of the founders of a large high-tech company told me. “Now that we have grown, even a small investment takes months and reams of paper to approve.” As organizations age, flexibility decreases and controllability increases.

When an organization is both flexible and controllable, it is neither too young nor too old. It can control what it wants to do. This stage is called Prime. The function of leadership is to manage the organization in such a way that it is able to move to the next, more demanding stage of the life cycle, and arrive at and stay in Prime.

The Growing Stages
The first stage is called Courtship. The organization is not yet born. It exists only as an idea. In marriage, a love relationship is necessary for establishing commitment. In the corporate life cycle, the founder must fall in love with the idea of the company. It is this love that is going to sustain the founder’s motivation during difficult times. In Courtship, the founder’s motivating goal should be to satisfy a market need. If he speaks about return on investment exclusively, his commitment is not sufficient to sustain the newborn company when difficulties arise.

It is normal to have doubts during the Courtship stage. The normal doubts the founder should answer are: What exactly are we going to do? How is it going to be done? When should it be done? Who is going to do it and why? This is reality testing. A Courtship that has no reality testing is an Affair; at the first sign of obstacles, the commitment evaporates. What is an Affair but lots of enthusiasm with no real commitment?

During Infancy, the focus shifts from ideas and possibilities to the production of results—sales. A company in Infancy has few policies, systems, procedures or budgets. The organization is a one-person show. No one else is capable of leading if the founder dies. It is like a real infant. To survive, it needs two things: periodic infusion of milk (operating capital) and parents’ love (founder’s commitment).

Since Infant organizations are short on cash, they should do rolling 16-week-forward cash flow projections, which should be monitored weekly. Infant organizations must also monitor the turnover of inventory and receivables.

A healthy Infancy is one that has a balanced growth reflecting cash availability. The founder feels he is in control. None of the daily crises are fatal. It is normal that the founder is working long hours, does not delegate, and makes all the decisions. Delegation is not desirable at this stage, because the unlimited dedication to his creation is what keeps the founder going.

Infant mortality will occur when the founder loses control of the organization, or if the company irreparably loses liquidity.

The idea is working, the company has overcome negative cash flow and sales are up. The company is not only surviving, it is flourishing. This makes the founder and the organization arrogant. As a result, Go-Gos usually will get into trouble by going in too many directions at the same time. Go-Go companies are like babies when they begin to crawl—they’re into everything. They see no problems, only opportunities. Everything they touch, they either eat or break.

The success of the Go-Go is the realization of the founder’s dreams, and if one dream can be realized, why not other dreams too? The founder becomes sloppy in his investments. He does not plan for results—he expects them. Frequently, he will have to pay the price.

At this stage, there is little training, few performance appraisals or salary systems. The company is organized around people, not around tasks.

The organization realizes that it needs a set of rules and policies on what to do or not to do and how. Go-Go organizations that cannot develop their administrative systems, and that cannot institutionalize their leadership, fall into the Founder’s Trap. What began as a founder’s loving embrace is now a stranglehold stifling the continued growth of the company. When the founder dies, the company might die as well. The Founder’s Trap can also develop into a Family Trap, when a family member takes over the company on the basis of ownership, rather than competence and experience. This causes competent managers to leave the ship.

The appropriate therapy for the Go-Go organization is to help it realize what not to do. The sooner the Go-Go sets priorities, the faster it will focus and become more efficient.

The Second Birth and Coming of Age
During Adolescence, the company is being reborn apart from its founder—an emotional birth. In many ways, the company is like a teenager trying to establish independence from family.

The move to Adolescence requires delegation of authority. The founder must be able to say, “I am willing to subject myself to the company rather than have the company be subject to me.”

The emphasis necessarily switches to systems, policies and administration, which require a totally different set of skills. The company does not need someone like the founder. It needs an administrator. It must also undergo a displacement of goals, from “more is better” to “better is more” and from working harder to working smarter.

The end result of these factors—delegation of authority, change in leadership and goal displacement—is conflict with a capital C.

Conflict is normal in the Adolescent organization. Pathology occurs when there is a critical loss of mutual respect and trust among those who control the decision-making process. This causes a turnover of personnel, especially of the entrepreneurial types. The organization falls into Premature Aging.

What must be done in Adolescence? First, the company must start teambuilding to free the organization from its founder. Then it has to define and share its mission. It must restructure its organization so the team can transfer entrepreneurship from the founder downward. It is now ready to move the founder to become chairman or chief executive officer. A new leader can now be brought in with the title of chief operating officer. If the administrative systemization succeeds and leadership is institutionalized, the organization moves to the next stage and enters Prime.

Prime is the optimum point on the life cycle curve, where the organization achieves a balance of self-control and flexibility.

Prime organizations:

  • Have functional systems and organizational structure.
  • Have institutionalized vision and creativity.
  • Satisfy customer needs.
  • Make plans and follow up on those plans.
  • Predictably excel in performance.
  • Can afford growth in both sales and profitability.
  • Spin off new Infant organizations.

A Prime organization knows what it’s doing, where it’s going and how to get there. A Go-Go can tell you why it made money. A Prime can tell you why it is going to make money. And it does.

Principles of Corporate Life Cycles

  • When organizations are young, they are flexible but not always controllable. As they age, they become more controllable but less flexible.
  • What causes growing and aging is neither size nor time. A company can be 100 years old and flexible. It can be 10 years old and bureaucratic.
  • At each stage of the life cycle, there are problems. You must learn to differentiate between the normal problems that emerge at a particular stage and abnormal problems, which can lead to the demise of the company.
  • Success comes from the inside out. You have to solve problems on the inside so you can deal with the ones on the outside.
  • The purpose of management is to provide balanced growth or rejuvenation, bring the organization to Prime and keep it there.
  • Aging is a process that does not have to occur. An organization can remain in Prime forever, if it can continuously rejuvenate itself.

In Prime, a company has an aggressive budget, and the variance of actual over budget is tolerable.

It should be noted that Prime is not on the zenith of the life cycle curve. Prime does not mean that you have arrived, but that you are still growing. If the organization does not refuel its momentum, if it loses entrepreneurship, it will proceed to the phase called Stable, which is the end of growth and the beginning of decline.

The challenge of Prime is to stay in Prime. Managers must not allow form to take precedence over function. They can nurture entrepreneurship by spinning off satel- lites from the organization and creating a new life cycle curve. If the Prime organization does not decentralize, it will slip into Stable.

Aging Organizations
A Stable company is still strong, but is starting to lose its flexibility and spirit of creativity. There is increasing reliance on what has worked in the past.

Budgets for marketing research are reduced to boost profitability. Management development is substituted with management training. Short-term profitability considerations start taking over. Finance people become more important than marketing people.

The organization is still growing, as measured by sales, but the causes of decline are already present. If creativity is dormant long enough, it begins to affect the company’s ability to meet customer needs.

Consciousness-raising is the most critical task for the Stable organization. The assignments here are to forecast the future, foresee threats and opportunities, and stretch when setting goals. The next step is to rapidly decentralize the company to stimulate entrepreneurship.

This stage is identified by the following behavioral patterns:

  • Money is spent on control systems, benefits and facilities.
  • Emphasis is on how things are done, rather than what and why they are done.
  • Individuals are concerned about the company’s vitality, but the group motto is “Don’t make waves.”
  • There is formality in dress, address and tradition.
  • There is low internal innovation.

At the advanced stages of Aristocracy, products are out of date. Market share is being lost. There is negative cash flow and high turnover of good people. The fight for individual (not corporate) survival begins.

The Aristocratic organization needs a real awakening. The first step is to conduct a session at which participants share information about the problems the company is facing. This legitimizes the need for change and creates energy for resolving abnormal problems.

Early Bureaucracy
One main variable distinguishes the Aristocratic organization from Early Bureaucracy—managerial paranoia. In the Aristocratic organization, people are friendly and handle each other with kid gloves. In Early Bureaucracy, there are no gloves anymore, just bare knuckles. A ritual of human sacrifice starts. Every year, someone is blamed and gets fired.

Managers’ creative abilities are not directed toward creating better products but toward ensuring personal survival by eliminating and discrediting each other. As organizational performance further declines, people become even more paranoid. Since the better people are feared, they are either fired or leave. What kind of people are left? Administrators! Entrepreneurs come and go; administrators accumulate. The company converts itself into a full-blown Bureaucracy with its sole emphasis on rules and policies and no orientation toward satisfying customer needs. The back-biting at this stage requires prompt surgical treatment. People whose attitudes are negative or who are totally ineffective must be replaced. Management should sell unprofitable units and stop the negative cash flow. Emphasis must be on survival.

Bureaucracy and Death
A material handling company does not generate sufficient resources on its own. It justifies its existence not by the fact that it is functioning well, but by the fact that it exists.

Bureaucracies are kept alive by the monopoly they have on certain activities—a captive audience forced by law to buy their services. Pulling the plug would put many of these Bureaucratic organizations out of business.

Death occurs when no one is committed to the organization anymore.

Meet the Author
Ichak Adizes is a management consultant at the Adizes Institute, located in Santa Barbara, California, and on the Web at www.adizes.com. He is the author of Organizational Life Cycles: How and Why Corporations Grow and Die and What to Do About It.

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