How Companies Can Avoid a Midlife Crisis
Executives can avert the seemingly inevitable decline of many mature corporations by viewing their organization as a portfolio of business opportunities at various life cycle stages.
Topics
The common perception is that companies, like people, pass through a series of life stages.1 Each firm begins with the experimentation and rapid-fire learning of a startup, passes through a frantic adolescence as it scales its business model, matures into a reliable albeit dull middle age and finally lapses into inevitable decline. Some companies progress through this sequence as cohorts — think of the Route 128 minicomputer makers or Lancashire’s cotton mills.2 Others pass through the life cycle alone, as Polaroid Corp. and fashion and home furnishing company Laura Ashley did.
For many people, maturity is a tough life stage, hence the midlife crisis. The thrills and excitement of youth have passed. Only the aches and decline of old age lie ahead. Maturity can be tough for businesses as well. The opportunities for product innovation seem few and far between, and the organization focuses on the relentless pursuit of process efficiencies, which at best stave off the inevitable decline. Daring acquisitions or groundbreaking research projects are dismissed as unseemly attempts to regain lost youth, the corporate equivalent of buying a red Corvette. (See “About the Research.”)
References
1. Larry E. Greiner published the seminal piece on organizational life cycles. See L.E. Greiner, “Evolution and Revolution as Organizations Grow,” Harvard Business Review 50 (July–August 1972): 37–46. Subsequent scholars explored the life cycle model in greater detail. See J.R. Kimberly and R.H. Miles, “The Organizational Life Cycle” (San Francisco: Jossey-Bass, 1980). For a more recent review of life cycle theories, see A.H. Van de Ven and M.S. Poole, “Explaining Development and Change in Organizations,” Academy of Management Review 20, no. 3 (1995): 510–540.
2. The evolution of firms in a cohort often follows the life cycle of the underlying product technology. See S. Klepper and K.L. Simons, “The Making of an Oligopoly: Firm Survival and Technological Change in the Evolution of the U.S. Tire Industry,” Journal of Political Economy 108, no. 4 (2000): 728–760; S. Klepper and E. Graddy, “The Evolution of New Industries and the Determinants of Market Structure,” RAND Journal of Economics 21 (spring 1990): 27–44; and S. Klepper and K.L. Simons, “Technological Extinctions of Industrial Firms: An Inquiry Into Their Nature and Causes,” Industrial and Corporate Change 6, no. 2 (1997): 379–460.
3. Some empirical analysis supports the hypothesis that firms can be described as passing sequentially through a series of predictable stages. See D. Miller and P.H. Friesen, “Momentum and Revolution in Organizational Adaptation,” Academy of Management Journal 23 (1980): 591–614; and R. Drazin and R.K. Kazanjian, “A Reanalysis of Miller and Friesen’s Life Cycle Data,” Strategic Management Journal 11 (1990): 319–325. This research, however, is primarily descriptive and fails to articulate a theory of the underlying microprocesses to explain why firms pass through these stages. As a result, the models cannot predict which firms will pass through these life cycles, or explain exceptions.
4. More precisely, an opportunity is a novel combination of resources that create value (in excess of their value in alternative deployments) by meeting an unfulfilled need in the marketplace. The value created can come from either increasing customers’ willingness to pay or decreasing the cost of providing the goods or service.
5. The seminal work on the intrafirm resource allocation process was written by J.L. Bower, “Managing the Resource Allocation Process” (Boston: Harvard Business School Press, 1970). For a review of recent research, see J.L. Bower and C.G. Gilbert, eds., “From Resource Allocation to Strategy” (New York: Oxford University Press, 2006).
6. See D.N. Sull, “The Dynamics of Standing Still: Firestone Tire & Rubber and the Radial Revolution,” Business History Review 73 (fall 1999): 430–464.
7. J. Ross and B.M. Staw, “Organizational Escalation and Exit: Lessons From the Shoreham Nuclear Power Plant,” Academy of Management Journal 36 (1993): 701–732; and I. Brockner, “The Escalation of Commitment to a Failing Course of Action: Toward Theoretical Progress,” Academy of Management Review 17, no. 1 (1992): 39–61.
8. D.N. Sull, “No Exit: Overcapacity and Plant Closure in the U.S. Tire Industry,” Academy of Management Best Paper Proceedings (1997): 45–49.
9. J. Hagel III and M. Singer, “Unbundling the Corporation,” Harvard Business Review 77 (March–April 1999): 133–141; and C. Zook with J. Allen, “Profit From the Core: Growth Strategy in an Era of Turbulence” (Boston: Harvard Business School Press, 2001). Recently, strategy scholars have argued that this logic applies not only to routine tasks such as customer service but also to innovation — the core activity in renewing a company for the future. See C. Markides and P. Geroski, “Fast Second: How Smart Companies Bypass Radical Innovation to Enter and Dominate New Markets” (San Francisco: Jossey-Bass, 2004); and H.W. Chesbrough, “Open Innovation: The New Imperative for Creating and Profiting From Technology” (Boston: Harvard Business School Press, 2003). The argument again boils down to focus. Established firms excel at commercializing innovations by reducing their cost and bringing them to a wider market. They rarely do well in developing nonincremental innovations to rejuvenate their product or service offerings.
10. K.B. Clark and C.Y. Baldwin, “Capital Budgeting Systems and Capabilities Investments in U.S. Companies After World War II,” Business History Review 68, no. 1 (1994): 73–109.
11. M. Arndt, “3M’s Rising Star: Jim McNerney Is Racking Up Quite a Record at 3M. Now, Can He Rev Up Its Innovation Machine?” Business Week, Apr. 12, 2004, 62; and D. Del Re, “Pushing Past Post-its: By Allowing His Top Scientists to Peek Over the Horizon, 3M’s Larry Wendling Helped Turn a Century-Old Giant Into a Nanotech Pioneer,” Business 2.0, Nov. 2005, 54.
12. M. Baghai, S. Coley and D. White, “The Alchemy of Growth: Practical Insights for Building the Enduring Enterprise” (New York: Perseus, 2000). For an excellent description of IBM’s changes, see D. Garvin and L. Levesque, “Emerging Business Opportunities at IBM,” Harvard Business School case no. 304–075 (Boston: Harvard Business School Publishing, 2004).