The Life Cycle of Organizations

Stan Davis

[***(EDITOR’S NOTE: While traveling abroad, Tom Peters asked colleagues to guest-author his column.***]

All products and services while traveling abroad like all businesses, civilizations, and individuals while traveling abroad—have a life cycle. Most managers recognize this by developing new products to perpetuate the life of the company.

Yet, they cling to the mistaken belief that their organizations will live forever. They bring on new businesses within existing organizations. This practice ignores a fundamental truth: Organizations follow the four seasons of all living things—gestation, growth, maturity, and decline.

People usually bring on the next generation in the second, or growth, phase of their lives. Companies tend to wait until their products are mature and in decline. The consequence for companies is that their organizations are generally pretty old by then, too, and lack the energy, openness and flexibility they need to launch the next generation successfully.

Executives are able to say, “Our product line is maturing and we have to bring out the next generation.” But they seem unable to say, “Our organization is maturing and we have to phase it out, too, and bring on the next-generation organization.” Instead, they subscribe to the Jack Benny law of aging: 39 forever! The smile on Benny’s face, though, told you that he knew he wasn’t fooling anyone.

It’s not enough to develop new products inside aging organizations. Ultimately, the dynamics of a mature organization inhibit innovation and flexibility. That’s what happened to Xerox and Ford, and they had to rebuild their organizations before they could rebuild their businesses. It’s also what happened to Kodak, AT&T and GM, and they’re still trying to rebuild.

One of the best things you can do for your organization is to let it match your business, and that means with respect to age, too. If your organization is “38-plus,” trim down and keep fit, but most of all, nurture the next generation.

There are characteristics of every age. In their youth, companies are always organizationally underdeveloped. They are high on commitment and enthusiasm, low on rules and staff. Declining organizations, on the other hand, are always overdeveloped. They have lots of staff, too much hierarchy, and slow decision-making reflexes. In the beginning, they never hire consultants. In the end, they almost always do.

You can take some simple, practical steps to match your business and your organization.

* If you’re in the front end of your organization’s life cycle and planning a new venture, devote 20 percent of your business plan to an organizational plan that matches the business you are growing. You can’t expect an organization designed to run a $50 million business to run a $500 million business later on.

* If you are at the far end of the life cycle and bringing out next-generation products, work to lose numbers of people, layers of hierarchy, rules, and regulations. Believe it, you need much less organization. Less is more.

* Once your next-generation business is viable, spin it off and let it build its own organization. Create a family of businesses, each with its own organization and its own relationship to the larger, parent organization.

Imagine your company setting up new housekeeping rules of the game. You will only hire people who are willing to set themselves up in business. They can open businesses with themselves as the only employee. Their business is jointly owned by them and the parent company, who initially is their financial backer and sole customer. As they improve, there is a phased buyout plan so that they become the dominant owner. Each year they are allowed to sell an agreed-to percent of their services into the open market. To get started, however, they have a guaranteed market to their parent company.

Many people in large companies would rather be employees than entrepreneurs. The idea is to structure a model that allows them to be both. Take secretaries, for example. Not all of them will like or understand this arrangement. But the plan will attract those who do, and every 20th or 100th secretary may start another Kelly Services. One might franchise the other secretarial slots within the company. Another might diversify into desktop publishing, another into travel bookings or the seminars business.

“Sell” your food service to the folks who run your cafeteria instead of to Marriott, sell your mailroom to the people who work there instead of to Pitney-Bowes, and the security effort to your security officers instead of to Brinks. Don’t stop with the support activities either. Sell the accounting department to the accountants and the sales department to the sales personnel. The effect would be a corporate version of perestroika.

Many companies in Sweden are doing this as a way to motivate their people, who otherwise will not work harder because of the 80 percent personal income tax there. We should learn from them without needing such dubious incentives.

There is no absolute model. Most businesses transform themselves within a few product generations. You can’t grow successive business generations without also growing successive generations of organization to match. One thing is certain: To survive, your organization must fundamentally transform itself as rapidly as your business does.

Stan Davis is the author of Future Perfect and coauthor of the forthcoming Twenty-Twenty Vision (Simon & Schuster).