Leadership by Geoff Colvin

5 ways to keep your company alive

March 7, 2011: 1:05 PM ET

Think about it: Rare is the company that manages to live long into its golden years. Here's how a company can improve their odds of survival.

The Shell Mex House, Shell's former headquarters in London. Photo taken in 1955.

By Christian Stadler, contributor

(ManagementInnovationeXchange) -- Some companies have the knack of turning in stellar performance decade after decade.  To be sure, they may lose their way for a year or two, but somehow they overcome the setback and resume their relentless progress. General Electric is one such company. So is Shell. Understanding what sets these companies apart from their rivals is arguably the holy grail of managers and business scholars alike.

For the last six years, I have led a team of eight researchers in a study of some of Europe's oldest and best companies.  We asked:  What distinguishes companies that managed to perform at a very high level over very long periods from others that do not perform as well? To answer this question we selected a sample of companies that had turned in an extraordinarily high performance over the past 50 years (our gold medalists outperformed the stock exchange by at least the factor of 15) and compared each with another old company, whose performance was still good but which was well behind the very high performer (we call them silver medalists). Fifteen years after Collins and Porras' Built to Last, our work incorporates fresh insights from management science and provides the first non-U.S. perspective on long-range success.

Reading through corporate histories, collecting material in archives, and interviewing 34 CEOs, chairmen, and board members, a counterintuitive story emerged: the greatest companies do not excel through radical innovation or daring transformations, but adapt to a constantly changing environment by being intelligently conservative. They religiously apply what we call the "five principles of enduring success." While there's no guarantee that the companies we studied will never fall on hard times, we believe there is much to learn from their history.

1. Exploit before you explore

Some of our gold medalists were great innovators. But so were some of our silver medalists. What set the great companies apart was their ability to make the most of each innovation.  Glaxo (GSK), for example, refused to simply sell Zantac, an ulcer treatment, as a cheap "me-too" product. Launching five years after SmithKline's bestselling Tagamet, the company decided to charge a premium. When sales reps visited doctors, the high price tipped them into believing that Zantac was a major advancement.  Unconventional, but it helped to make Zantac the best selling drug of all time. In contrast, silver medalist Wellcome was primarily known for its outstanding science and often referred to as Britain's "only quoted University." Glaxo acquired Wellcome in 1995 and started to exploit its fantastic drug pipeline. The implication for leaders is straightforward: stress efficient exploitation of your innovations. Glaxo CEO Paul Girolami, for example, pressed hard to convince his leadership team that a premium price was the best sales strategy.

2. Diversify into related businesses

The gold medalists consistently diversified into related businesses and markets to exploit economies of scope. Take the contrasting tales of Allianz and Aachner und Münchener Versicherung. While the former diversified step-by-step -- starting with transport insurance in 1890, building a fledgling casualty insurance, then its industrial insurance business next, and adding auto and life insurance before 1925 -- the latter remain narrowly focused. For the first 40 years A&M sold only fire insurances. Only in 1924 -- a century after the company was founded -- did it begin to diversify. It was too little, too late. While Allianz thrived, A&M missed the great opportunities provided by German industrialization.

Today, when leaders are under pressure to focus on their core business, they have to remember that related industries might offer great opportunities to build their capabilities.  Likewise, the leaders of conglomerates from emerging economies (Tata, for example) might consider whether developing a slightly more focused approach is appropriate as they enter the global market.

3. Manage your finances conservatively

In our personal lives we put money aside in good times to be ready when we fall on hard ones. Companies are less likely to be that conservative. Growth is simply too great a temptation and, prior to the financial crisis, corporate leaders were expected to show an appetite for risk.

The great companies we studied never fell for such shortsightedness. Siemens (SI), for example, valued its assets in a much more conservative manner in the 1920s and did not experience the same financial squeeze during the Great Depression as the more aggressive AEG (the German electrical equipment company which was later merged into DaimlerChrysler and Electrolux).

After World War II, silver medalist AEG pursued growth at all costs -- it attempted to match Siemens in terms of revenues, but did so at the expense of profits, slowly but surely running out of options and ultimately entering bankruptcy.

While memories from the financial crisis are still fresh in the minds of today's leaders, they will once again be tempted to focus on growth as the economy regains momentum. That is the right approach, as long as they keep in mind that profitable growth will lead them and future generations to success.

4. Remember your mistakes

It's fun to tell a story of triumph and success. Such stories are important to motivate and inspire employees. But what really separates the great from the good is the former's courage to also remember mistakes. Take the case of Shell (RDSA). In the years before World War II, Shell was very much a one-man-band led by Sir Henri Deterding. Under Deterding's firm control, the group prospered but also flirted with disaster as he saw Adolf Hitler as the man most likely to preserve Europe from Communism.

Luckily for Shell, Deterding retired in 1936 before he could make any disastrous commitments. The company did not forget its narrow escape. In 1964, the board rejected advice from McKinsey & Company to install a powerful American-style chief executive officer. Instead, the company installed a committee as the top executive authority in the company. The chairman was only marginally more responsible than other members of the management board. The unconventional structure fueled, rather than hindered, Shell's success. There's a simple but tough lesson here: mistakes are genuine learning opportunities. Don't try to hide them -- use them! Enshrine them in your history.

5. Manage change in a culturally sensitive manner

No company survives for many decades without going through major transformation.  Change is never easy, but great companies change in a culturally sensitive manner.

What does this mean?

These companies pursue change in a way that displays deep respect and understanding of existing mores and practices inside the organization. For example, when Siemens restructured in the 1960s, management left many of the traditional arrangements and practices in place for as long as 20 years after the reorganization had been formally completed.

In contrast, we found that silver medalist AEG took a far hastier and less sensitive approach. Change began with the appointment of the abrasive Hans Heyne as CEO in 1962. Disregarding longstanding traditions, he created an atmosphere in which managers were unable to take real responsibilities. Fear, rather than creativity, took hold. Many top managers left and those who stayed were often referred to as "Heyne's Würstchen" (Heyne's little sausages).

The lesson for managers? Again, it's easy to articulate, difficult to follow: Efforts to change a company will not succeed against the will of its employees. The first important step in any significant change is to listen to the organization, then to communicate plans, and only in a final stage to implement change. That might stretch the process out, but will ensure success in the long run.

***

Every generation views its time as unparalleled and uniquely challenging. And we tend to overweight the present and undervalue the past when it comes to inventing our future. The companies in our study survived the Great Depression, two world wars, and two oil crises. They saw the advent of new technologies, including television, air travel and the Internet. Their histories may not provide immediate solutions for specific business' problems, but they do provide profound insights into how companies can approach the challenges they face and which strategies might help them prevail.

Christian Stadler teaches strategy at the University of Bath School of Management. His research focuses on long-living corporations -- how they grow, adapt, and consistently beat their competitors -- and is chronicled in his new book his new book Enduring Success: What We Can Learn from the History of Outstanding Corporations.

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