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Kellogg School Corner: Better built, to last longer

Kellogg School Corner: Better built, to last longer
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First Published: Mon, Jul 02 2007. 01 25 AM IST
Updated: Mon, Jul 02 2007. 01 25 AM IST
Let’s explore business longevity. Much research, including that by the IMD-Lombard Odier Darier Hentsch Family Business Research Center, has proclaimed the superior financial performance of family-controlled firms. But what about their life expectancy? Evidence suggests family-controlled firms seem more enduring as well. Research into the largest firms in the world by McKinsey & Co. consultants shows only about 15% live 35-40 years or longer. Our own research shows that 20% of family-controlled companies last, as independent institutions, at least 50 years.
To identify the special characteristics of family firms that help them last longer, we studied 100+ year family firms, and drew insights from two classic books on business longevity—The Living Company by Arie de Geus (1997) and Built to Last by James Collins and Jerry Porres (1994).
First, the anti-argument is proposed. Family firms shouldn’t be able to last longer, as they have extra difficult challenges to continuity. All businesses, of course, face the troubling and turbulent times of global competition, fast change and new technologies. But, over and above that, family firms must confront death taxes, the special struggles of succession and family calls for liquidity. For family firms to last, they must have particular ways of doing business that more than overcome these extraordinary, extra challenges.
The centenarian companies we studied showed some common characteristics: their purpose is continuity—to be an enduring institution rather than one maximizing profits; their special competency is ProActiveAdaptAbility rather than economic core capabilities; and their culture emphasizes prudence in decision-making.
Now, let us compare these insights to the lessons from the two books. The Living Company was written by a Royal Dutch Shell internal consultant to commemorate its 125th anniversary, and looked at very large companies which had sustained themselves at least as long as Shell. De Geus was struck by the fact that one-third of the Fortune 500 didn’t stay intact even 15 years. Only 30-40 companies had, like Shell, become a leader of their industry and survived more than 100 years, he found. The companies studied included DuPont, Kodak, Unilever, Mitsui and Sumitomo. The Living Company study concluded:
1. Sensitivity to the environment allows the company to adapt.
2. Cohesion and identity help the company build a community within itself.
3. Autonomous units create new business relationships in different areas of activity.
4. Conservative financing assures growth and evolutionary development.
In sum, we see lessons for survival, resilience and adaptability. Further, the author notes, these companies are more focused on perpetuating themselves as an ongoing community than on seeking an economic return.
Built to Last also looks at long-living companies for lessons of endurance. Their methodology was to match a great performer in an industry with a not-great performer and look for differences. For example, they compared General Electric with Westinghouse, Merck with Pfizer, Procter & Gamble with Colgate, etc. In all, they had 18 pairs to examine. About half of the “successful” firms were family controlled or influenced, and almost none of the “unsuccessful” firms were so. For example, some of the favourable companies were Ford, Wal-Mart, Marriott, Nordstrom, Motorola and Hewlett-Packard.
After analysing their pairs, the authors offered the following prescriptions: Develop a strong core ideology of values and purpose Use “big, hairy, audacious goals” (BHAGs) to stretch the company Promote a cult-like organizational culture Pursue evolutionary progress through experimentation, decentralization and autonomy Keep leaders in place for long periods to gain consistency and stability Improve continuously by investing heavily in people, early market adoption and long-term asset growth.
These propositions have since become famous in managerial conventional wisdom.
There are, of course, several similarities among the books and our cases: Purpose is more than profit Adaptability comes from tolerance for autonomous experimentation Strong, distinct culture is the foundation.
The family firms averaged stronger scores on all but one of these Built to Last propositions—the advocacy for BHAGs. This is no surprise to those from family firms. The prudence of family firms keeps them from stretching into the speculative world. They adapt, they improve, but they don’t exaggerate their ambitions or their risks.
One of the Built to Last propositions is particularly strong in the family firms: cultist culture. Firms with cultist cultures put a lot of energy in distinguishing their culture. They work hard at employee orientation, articulating their values, promoting from within, employee communications and social activities. They promote past “heroes”, storytelling and company rituals.
In all the three studies, the common factor among family firms was a focus on continuity above profits. For family firms, the company is more than a company; it is an institution, and institutions deserve a life of their own.
Prudence is more than financial conservatism, which it certainly requires. Prudence is also the care to “do the right thing” and to protect the firm’s (and its owners’) reputation. Prudence also leads to sensibility not only in risk taking, but in spending and in managerial incentives.
Our studies shed a special light on adaptability and evolutionary development. We call this ProActiveAdaptAbility. The phrase is so emphasized to suggest more than the resilience to endure negative surprise, and more than the flexibility to adjust plans as needed. Long-lasting family firms are also proactive in seeking new opportunities to adapt to. Because they tend to have vertical integration and more diversification, they are constantly sensing and testing new ideas all around themselves. Because continuity is the purpose, with prudence as the governor, they make lots of little experiments all the time. They develop the ability to be adaptable, deliberately.
The three studies discussed show lessons for longevity. Family businesses seem better built to last longer.
John Ward is clinical professor of family enterprises at Kellogg School of Management
Send your comments to kelloggscorner @livemint.com
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First Published: Mon, Jul 02 2007. 01 25 AM IST