sustained business success, corporate life-cycle

The notion of a corporate life-cycle seems perfectly rational. If everything else, from nation states to family businesses, passes through a sequence of rise, maturity, success and decline, why not companies? In fact, the mortality rate of large Anglo-Saxon companies is high. The issue, however, is why corporate death occurs and what can be done to prevent that fate - and even to achieve a rebirth.

The great and pre-eminently rational Warren Buffett believes in everlasting corporate triumph. He regards some of his stock market investments as permanent, calling them 'The Inevitables'. Two of Buffett's dearest loves are Coca-Cola and Gillette. He says that 'no sensible observer... questions that Coca-Cola and Gillette will dominate their fields worldwide for an investment lifetime. Indeed, the dominance will probably strengthen.'

SHARED SENTIMENTS
No doubt, the managements of both companies fully share Buffett's sentiments. But the harsh fact is that both companies have faltered in 1998-99. The death from lung cancer of Robert Goizueta coincided eerily with the abrupt end of the unique success (30.1% p.a return to investors from 1988-98) over which he had presided at Coke. At Gillette, too, the leadership changed - and again the rich period of profitable growth (29.5% p.a) came to an end. In 1998, investors in neither company had gains to relish.

It is tempting to associate these setbacks, not with the life-cycle of corporations, but with that of individuals. The evidence suggests strongly that Doug Ivester, the hand-picked successor to Goizueta, has nothing of the latter's genius. Although Buffett (a Coke director as well as a huge investor) stands loyally by Ivester, the latter is a numbers-obsessed manager - and directing giant corporations is a people business.

Al Zeien, the departed Gillette boss, exemplified this truth by heeding his 'human resources' people and personally conducting 300 appraisals a year - giving him unrivalled knowledge, not just of key people, but of what was really happening in the businesses. That is the key issue, and the danger point. Buffett writes as follows about The Inevitables:

'Nor is our talk of inevitability meant to play down the vital work that these companies must continue to carry out, in such areas as manufacturing, distribution, packaging and product innovation.'

What goes wrong is that the company suffers relative declines in efficiency in such areas (relative either to its own previous standards or the competition's). Reaction is either too little and/or too late. That has five explanations.

1. Denial. Because of its high opinion of itself, management cannot accept criticism of its operations.
2. Systemic failure. The organisation is geared to continuity, not to unsystematic, radical improvement and reform.
3. Bureaucracy. The layers of command and control slow down reactions.
4. Complacency. A rich cash flow cushions any sense of urgency.
5. Conservatism. Dissenting voices are ignored or suppressed by senior managers who are sure that they know better.

FIVE FATAL FLAWS
The Five Fatal Flaws interplay and interrelate to produce incompetence and inertia. These had beset Coke before Goizueta took charge. He was able to demonstrate that the great company was earning less than its cost of capital. By totally changing the way the businesses and managers were assessed, and by radically reforming key relationships with the Coke bottlers, Goizueta engineered a spectacular improvement in performance.

That is another aspect of the corporate life-cycle. If downturns in performance do occur, a striking once-for-all recovery is within the reach of top management, even if performance merely returns to previous levels. That first-stage rocket gives the new man's reign a huge and lasting boost - but the next incumbent, coming in on the crest of the wave, has an impossible act to follow. The once-for-all benefits have been won, and there's no encore.

This unpromising situation, of course, is not the fault of the successor. The operating problems at Marks and Spencer, previously considered Britain's best managed company of any kind and a retailer second-to-none worldwide, were building long before Sir Richard Greenbury finally handed over. His misfortune was that the board, unable to endorse the heir-apparent, delayed Greenbury's departure until the damage done by the Fatal Flaws had emerged.

Greenbury, like Goizueta at Coke, had begun his reign by forcing through powerful reforms that had produced marked gains in growth and profits. But success in a chief executive can easily reinforce the Fatal Flaws. Not only does he become impervious to criticism: he gets less of it anyway. Exactly the same process of dominance and deference happens when decisions are taken. Management becomes less collective and more dictatorial.

The appalling M&S results (the worst sales declines in its history) have been blamed on failure to keep up with fashion on the clothing side. It's true that the goods, and the stores themselves, had come to look out of date, dowdy. This coincided with a perception among customers that, from offering high quality at moderate prices, the chain had shifted to providing only moderate quality at high prices.

Such seismic shifts in perception do not take place overnight. Tracking studies had long shown an unprecedented drop in customers' regard for the chain, which had previously run far ahead of all other retailers on every count. Declines of this kind invariably precede falls in sales, usually with a long enough lead-time to forestall the trouble - if the business is geared to action.

Enter the malign effect of the Five Fatals. At M&S, crucially, internal studies had pointed to a decline in quality that was also appearing in customer anecdotes. The reports stimulated action, of a sort: a study group was set to work. Yet the location of the problem was stunningly obvious without study - the source could only be the supplier relationship.

VIRTUAL COMPANY
One of M&S supreme claims to fame was its path-finding for what's now known as 'the virtual company'. Self-styled famously as 'a manufacturer without factories', M&S itself designed the products, bought the fabric, prescribed the quality and the manufacturing methods, ordained the price and the deliveries. The relationship, though, was old-fashioned by today's standards, in which the supplier is a genuine partner who takes initiatives to improve the product, raise efficiency and share gained economies.

The M&S system had become too slow, cumbersome and inefficient for fast-moving modern markets. If quality suffered in consequence, that struck to the very heart of the business. The specific troubles reported by press and suffered by the customers were symptoms of decline, not causes. The causes are usually insidious and slow-working, while the symptoms are obvious and immediate.

But any expert in Total Quality Management will tell you that treating the symptoms without removing the causes is a dead end (often literally). Like most retail chains, M&S developed a highly centralised, over-prescriptive management system that has stifled and wasted the talents of some brilliant recruits - with the result that the most excellent moved on.

Curiously, given the heavy weight he generally places on managerial excellence, Buffett pays it no attention in his discussion of what makes The Inevitables inevitable. Market leadership, he writes, 'alone provides no certainties: Witness the shocks... at General Motors, IBM and Sears, all of which had enjoyed long periods of seeming invincibility'. He believes 'some industries or lines of business exhibit characteristics that endow leaders with virtually insurmountable advantages, and that tend to establish Survival of the Fittest as almost a natural law'. But 'most do not'.

NO NATURAL LAW
Frankly, the great man has veered into nonsense. No natural law 'almost' guarantees corporate success. Even Buffett does mention one way in which management can destroy inevitability - 'when it gets sidetracked' and neglects its 'wonderful base business' while purchasing other businesses 'that are so-so or worse'.

Loss of focus definitely hurt one of Buffett's cautionary examples, Sears. But IBM's troubles flowed from excessive focus on its 'wonderful base business' in mainframe computers, which caused tragic neglect of the other opportunities burgeoning all around the company. As for GM, its purchases of other businesses - Hughes Aircraft and Electronic Data Services - were huge hits that offset some of the damage done by mismanagement of the base car business.

Countering the corporate life-cycle therefore starts with one inevitable conclusion. The First Law is that there are no Inevitables. Any market position, whether it's Coke's, or Gillette's, GM's or IBM's, is only as good as its exploitation. That applies to small companies as well as large: the only difference is that the large company has enormous reserves of financial wealth and other resources to defend itself against its own incompetence. M&S, after all, will make over £600 million of profit in a dreadful year.

The Second Law is that the organisation and its culture need continuous renewal - a cousin to kaizen, or continuous improvement. So select the few vital indicators of present and future performance (which must include external and internal perceptions): set annual targets for these indicators and act urgently if any indicator starts pointing downwards.

Third, combine kaizen with kaikaku - radical change. Re-examine the selected criteria annually to decide which are no longer relevant and which new ones are required. Also, conduct an exhaustive search for evidence of the Five Fatal Flaws: Denial, Systemic Failure, Bureaucracy, Complacency, Conservatism. Use a suggestion scheme approach and reward employees who identify examples of the Flaws and/or recommend radical ways of eliminating the defects.

YOUNG TURKS
Fourth, form squads of Young Turks to work on areas (like improving the appallingly long lead-times at M&S, or revolutionising its awful window-dressing) that are either self-selected or identified by senior management. Keep these multi-disciplinary, cross-factional teams in permanent being, adding to and subtracting from membership as necessary, and watch their performance closely to identify the heretics, challengers and doers.

Fifth, review the chief executive's performance rigorously at regular intervals in relation to agreed targets, most of which should not be financial, and none of which should be operational - save one. That is the selection and management of operators who deliver required performance on the key indicators.

Sixth, develop a pool of rising managers who have proved their potential by their thinking and practical achievement in demanding roles. Their levels of heresy, challenge and 'making it happen' (very possibly as official Young Turks) should be crucial. Name a date for the chief executive to step down: stick to it. If nobody in the pool measures up, start looking outside well before need.

Never leave this top appointment to the predecessor. Goizueta became Coke's head because the choice was made solely by a Grand Old Man, Robert Woodruff. That's the seventh step in making the corporate success cycle seem inevitable. But remember: it never is.