So be very careful what you promise, and make sure you can deliver on it. If you really want your business to last, put the effort into hiring and retaining good talent. Your employees could mean the difference between long-term success and a short-lived dream. For me, finding the right partner at the start and staff that could handle the day-to-day gave me the time I needed to focus on growth and expansion.
Despite the high unemployment rate, the talented are not going to work for free or at a discounted rate. When you find the right employees, pay them fairly and show your appreciation.
Entrepreneurship is hard, and it's no secret that it comes with many challenges. Just when you think you have everything in place, a setback comes your way. If you want your company to last, you can't get discouraged when the small fires start to pile up. I can think of a hundred times when I wanted to throw my hands up and quit. But instead of giving up on the spot, I took a moment to reflect on why I started the business in the first place, and carried on utilizing the strength of my team and finding one solution at a time.
By , it had created a whole division focused on the new market for auto insurance, and within a few years it became the dominant player in the life insurance market, with the foundation of Allianz Life as a joint venture with Munich Re and several banks. A closer union failed, but based on these experiences, Allianz formed its own business in Within three decades of its creation, Allianz had become the leading German insurance company in all the lines of insurance it offered, both life and nonlife.
When it did diversify, the new businesses represented little more than product extensions. Both deals were steps in the right direction, but they proved too little too late. Geographic diversification is as important as product range, as the contrasting experiences of the two leading French cement producers show. Gold medalist Lafarge began as a family-controlled cement producer in southern France.
But Lafarge felt that it could not rely on its home market alone and diversified internationally at an early date. The first step abroad was a large contract to deliver , tonnes of lime for the construction of the Suez Canal in After World War II, Lafarge used the cash generated by postwar growth to speed its internationalization and diversify into related industries, such as aggregates and ready-mix concrete.
When the first oil crisis ended the building boom in France in , Lafarge was doing business in 15 countries. Growth opportunities in the developing world thus compensated for the slowdown in France. Originally, in , a producer of Portland cement in northern France, the firm operated almost exclusively in France for the next years.
The only exception was a small presence in Morocco, starting in the s. The company never recovered. Supply-side diversification also matters.
On March 17, , a fire in a Philips factory in Albuquerque, New Mexico, disrupted the global mobile-phone supply chain. Gold medalist Nokia had alternative suppliers in the U. Silver medalist Ericsson, on the other hand, had no backup suppliers. In an early cost-cutting exercise, the company had decided to concentrate on a single supplier—and paid the price. Powerful experiences often develop into enduring stories that are passed on from generation to generation.
Successful companies, naturally, have good stories to tell, and they tell them constantly. This practice helps motivate people and inspires them to act in ways that produced success in the past and are likely to continue to in the future. But what really separates the great from the good is that the great companies also remember their mistakes.
Take the case of Shell. Under his firm control, the corporation prospered and became one of the main rivals to the great American oil companies that emerged from the breakup of the Standard Oil Trust.
Unfortunately, it also put him in a position to consider financial and moral support for Adolf Hitler, whom Deterding saw as the man most likely to preserve Europe from the Communists. Deterding visited Germany frequently and eventually married a German. Luckily for Shell, he retired in , before he could make any commitments that would have embarrassed the company later on.
Instead, the board installed a Committee of Managing Directors as the top executive authority in the company. Its chairman was only marginally more responsible than its other members. Still, even now, it has remained remarkably careful to avoid placing an authoritarian leader at the top. After receiving compensation two years later following a coup, BP failed to diversify its asset base significantly in the ensuring decades, ending up heavily dependent on a small number of sites in Alaska and the North Sea.
As oil prices plummeted toward the end of the s, those assets lost value, and BP found itself caught short again. Doggedly repeating its mistake, it embarked on a new elephant hunt and is now as heavily dependent on sites in Russia and other former Soviet states as it was on its Iranian assets. Although BP has already suffered dramatically from its failure to observe the principle of diversification, it is clear the company has not taken the lesson to heart.
There are many other places in the world where large claims are made. Discussions usually take place, and a settlement is reached. Gold medalist HSBC also recalls the lessons of its past mistakes. The Hong Kong and Shanghai Banking Corporation was set up in by the merchant community in Hong Kong to finance international trade. Financing investments in fixed assets in China turned out to be riskier than anticipated, and access to London capital was more complicated for HSBC than it was for its UK-based competitors.
This hit HSBC doubly hard when a severe recession struck in The bank decided to adopt a more balanced management approach, which continues to dominate its strategy to this day.
In , it established a second executive board in London, creating a balance of power between the trade finance business in the East and the capital allocation center in London. The bank also increased its efforts to build up reserves and made sure that senior managers no longer had business interests outside the bank. Silver medalist Standard Chartered the Chartered Bank of India, Australia and China at its founding in , in contrast, did not learn from its biggest mistake, which was creating a centralized London-based management system, which had a limited understanding of the China market.
It lost major business to HSBC on numerous occasions—in the mids, for instance, it lost out because repayment periods for trade bills were shortened by London against the advice of local managers. Nonetheless, the company stuck to the old system.
In the following decades, the firm survived despite, not because of, its centralized management. Local branch managers simply ignored orders from London, which they saw as unfit. Great companies beg to differ. They go through radical change only at very selective moments in their history.
Jumping onto every new management wave is not for them. They use their core values and principles as guidelines and approach change in a culturally sensitive manner that requires patience to work through. Schumpeterian logic tells us that creative destruction is the only way to survive in modern capitalism. They go through radical change very, very selectively. In the s, gold medalist Siemens and archrival AEG were operating in the same business environment: a postwar Germany that was enjoying miraculous economic growth and providing great opportunities for companies in electrical engineering.
Broadly speaking, the two corporations had similar strategies and structures. Both were geared toward growth, and both had ambitions to establish themselves in foreign markets. Both should have fared very well into the s. But while AEG had been able to catch up with Siemens in the s, its profit margins started to fall at the end of the s, never to recover again.
What happened? The answer seems to lie in the way the two companies managed major changes in the s. Gold medalist Siemens took a very deliberate approach to its changes, initiating them only when it could see a clear strategic case for restructuring the business portfolio and then taking its time over implementation to make the transformation as painless as possible for the workforce. Change came to Siemens for four reasons, any one of which would on its own have provided ample justification.
First, management recognized that the long-standing separation between its high-current power generation and low-current telecommunications technologies was no longer appropriate. Indeed, duplications in research and production had been primarily caused by a lack of cooperation between its Halske low-current and Schuckert high-current subsidiaries. Third, on top of these strategic considerations was the fear of what would happen when then-chairman Ernst von Siemens retired. Finally, the German government was preparing legislation that would force the corporation to reveal sensitive information about its operations unless it consolidated its subsidiaries.
Siemens was very deliberate in the way it responded to those pressures. Over the following years, it closed or sold off the radio and TV production businesses, leaving it with a rump appliance business, which it spun off into a joint venture with Robert Bosch, a leading appliance maker, in , a full decade after it had begun the process.
The company was no less deliberate in its response to the pressure to integrate Halske and Schuckert. The decision to merge them was announced in , but it was not until that the two subsidiaries were formally replaced by six divisions: components, data technology, energy technology, installation technology, medical technology, and telecommunications.
In , a group at Shell set out to learn something about long-term corporate survival by studying companies older than Shell. Shell was about years old at the time, so we looked for companies that already existed by the fourth quarter of the nineteenth century, that were important in their industries, and that still had strong corporate identities.
Our team found 30 companies scattered throughout North America, Europe, and Japan that met those criteria. The companies ranged in age from to years. And 27 of them had reasonably well documented histories, including DuPont, W. Grace, Kodak, Mitsui, Sumitomo, and Siemens. As we all know, corporate history mostly consists of self-congratulatory books and articles written by people in the company itself about the virtues of the chief executive.
The data are not always reliable. Nevertheless, we believe that those histories gave us some insights and that we learned something valuable from our study.
The first thing we learned is that the average life span of a corporation is much shorter than its potential life span. We already had an inkling of that from studying the Fortune lists, and we obtained confirming data from registries in North America, Europe, and Japan. In most of those places, the law requires the births and deaths of companies to be registered. With those three pieces of information, we could calculate the average life expectancy of companies, and we found that across the Northern Hemisphere, average corporate life expectancy was well below 20 years.
Only the large companies we studied, which had started to expand after they survived infancy—during which the mortality rate is extremely high—continued to live on average another 20 to 30 years. It appears that in the corporation we have a species with a maximum life expectancy in the hundreds of years but an average life expectancy of less than 50 years. If this species were Homo sapiens, we could rightly say that it was still in the Neanderthal age—that it had not yet realized its potential.
Neanderthals had an average life expectancy of approximately 30 years, but, biologically speaking, the human species has a maximum life expectancy of years or more. That longevity gap is very similar to the one we found between short-lived and long-lived corporations. Stora, the most dramatic example in our study, survived the Middle Ages, the Reformation, the wars of the s, the Industrial Revolution, and the two world wars of the twentieth century.
For most of its life, it depended on runners, horsemen, and ships instead of on telephones, airplanes, and electronic networks to carry messages. Its production technologies changed over time from steam to internal combustion to electricity to the microchip. And Stora continues to adapt to an ever changing world. What do the extraordinarily successful companies have in common? To find out, we looked for correlations. We know that correlations are not always reliable; nevertheless, in the 27 survivors, our group saw four shared personality traits that could explain their longevity.
Conservatism in Financing. The companies did not risk their capital gratuitously. They understood the meaning of money in an old-fashioned way; they knew the usefulness of spare cash in the kitty. Money in hand allowed them to snap up options when their competitors could not. They did not have to convince third-party financiers of the attractiveness of opportunities they wanted to pursue.
Money in the kitty allowed them to govern their growth and evolution. Sensitivity to the World Around Them. As wars, depressions, technologies, and politics surged and ebbed, they always seemed to excel at keeping their feelers out, staying attuned to whatever was going on. For information, they sometimes relied on packets carried over vast distances by portage and ship, yet they managed to react in a timely fashion to whatever news they received.
They were good at learning and adapting. Awareness of Their Identity. No matter how broadly diversified the companies were, their employees all felt like parts of a whole. Lord Cole, chairman of Unilever in the s, for example, saw the company as a fleet of ships. Each ship was independent, but the whole fleet was greater than the sum of its parts.
The feeling of belonging to an organization and identifying with its achievements is often dismissed as soft. But case histories repeatedly show that a sense of community is essential for long-term survival. Managers in the living companies we studied were chosen mostly from within, and all considered themselves to be stewards of a long-standing enterprise.
Their top priority was keeping the institution at least as healthy as it had been when they took over. Tolerance of New Ideas.
The long-lived companies in our study tolerated activities in the margin: experiments and eccentricities that stretched their understanding. They recognized that new businesses may be entirely unrelated to existing businesses and that the act of starting a business need not be centrally controlled. Grace, from its very beginning, encouraged autonomous experimentation. The company was founded in by an Irish immigrant in Peru and traded in guano, a natural fertilizer, before it moved into sugar and tin.
Eventually, the company established Pan American Airways. Today it is primarily a chemical company, although it is also the leading provider of kidney dialysis services in the United States. By definition, a company that survives for more than a century exists in a world it cannot hope to control.
Multinational companies are similar to the long-surviving companies of our study in that way. The world of a multinational is very large and stretches across many cultures. That world is inherently less stable and more difficult to influence than a confined national habitat. Multinationals, like enduring companies, must be willing to change in order to succeed. These four traits form the essential character of companies that have functioned successfully for hundreds of years.
Given this basic personality, what priorities do the managers of living companies set for themselves and their employees? The manager of a living company understands that keeping the company alive means handing it over to a successor in at least the same health that it was in when he or she took charge. To do that, a manager must let people grow within a community that is held together by clearly stated values. The manager, therefore, must place commitment to people before assets, respect for innovation before devotion to policy, the messiness of learning before orderly procedures, and the perpetuation of the community before all other concerns.
Valuing People, Not Assets. This inversion of traditional managerial priorities is supported by a surprising finding in our study: each of the 27 long-lived companies changed its business portfolio completely at least once.
DuPont, which is approximately years old, started out as a gunpowder company. In the s, it was the major shareholder of General Motors, and now DuPont is a specialty chemical company.
Mitsui, which is about years old, began as a drapery shop. It then became a bank, went into mining, and at the end of the nineteenth century, the company moved into manufacturing. Those histories tell me that such companies are willing to scuttle assets in order to survive. To them, assets—and profits—are like oxygen: necessary for life but not the purpose of life. Stora was in copper in order to exist; it did not exist to be in copper. These companies know that assets are just means to earning a living.
A company run according to a different model scuttles people to save its plant and equipment, which it considers the essence of its being. If such a company were in the car rental business today, for example, it would see itself as existing to rent cars. If such companies find themselves in trouble, they get rid of people. Loosening Steering and Control. If long-term corporate health and survival across generations require a willingness to change the business portfolio, managers must heed the opinions and practices of other people.
The organization must give people the space to develop ideas. They must have some freedom from control, from direction, and from punishment for failures. In other words, managers must put the principle of tolerance into practice by taking risks with people and looking in new places in search of fresh ideas.
Perhaps the best way to illustrate that notion is through the metaphor of rose gardening. That technique forces the plant to channel all its resources into a relatively small number of growth buds. Why would you prune your roses in that way?
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