Best Practices Article - KNOWLEDGE

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"Understanding the Life Cycle of Businesses

By Dr. Ichak Adizes
Dr. Adizes is one of the world's leading experts on organizational performance and change. Over the past 35 years, he has worked with some of the world's largest corporations and consulted with many heads of state. (www.adizes.com)

BACKGROUND

Over the years, many professionals in the organization development (O.D.) field have studied highly effective and successful organizations to find the common traits and characteristics that exist amongst them.

P.R.I.M.E. is just one of the acronyms used to describe the traits of highly effective and successful organizations. P.R.I.M.E. organizations are said to possess:

P = Predictable revenues with sustainable profitability
R = Recognized and respected in the marketplace by clients and competitors
I = Integrated and balanced enterprise with well defined infrastructure
M = Mature culture and attitudes
E = Entrepreneurial and enterprising to keep innovating and moving forward

LIFE CYCLE OF A BUSINESS

STAGE 1 - Start ups

Stage 1 Start-ups begin the moment financial risk has been undertaken and the Founder quits his / her paying job, signs the loan documents or promises 40% of the company to outside investors.

Start-up organizations are necessarily action-oriented and opportunity-driven. The focus instantly changes from ideas to action. The time for talking is over. It is time to get to work and produce results (sales and cash). Like a real baby, start-up organizations need two things to survive: 1) periodic infusion of milk (operating capital), and 2) the unconditional love of their parents (Founder(s)).

Like a newborn baby learning to walk, performance in start-up organizations is inconsistent. Unexpected crises appear with little notice. Because start-up organizations lack systems, it's easy for them to get into trouble. Moving from one crisis to the next is normal. The Founder and all employees constantly test the limits of their endurance for work, stress and confusion. Employees are often attracted to start-up companies for reasons that go far beyond money; and their loyalty to the team often extends beyond the struggling start-ups ability to pay them. They end up working seven days a week and sleeping under their desks but still there is not enough time and talent to do everything that must be done.

Sales are useful for cash generation purposes, but their real value to the start-up organization is the market's validation of their new product or service. Ideas from demanding prospective beta testers and customers are needed by the start-up to complete the development of their innovative new products or services. Failing to sell to key accounts is an abnormal problem that will quickly lead to cash starvation, lack of continued interest from financial backers and the emotional collapse of the Founder.

Problems of Start-ups

• Customers experience problems with the product or service.
• Struggle to complete product or service.
• Chasing sales to generate cash that are not related to core business.
• Initial product or service concept fails and is replaced by another.
• Few procedures, rules, policies, or systems.
• Founder and others make mistakes.
• Management by crisis.
• Hands-on leaders deeply involved in day-to-day sales and operations.
• Lack of managerial depth.
• 1-person show. No delegation.
• Fast decision-making, some details missed.
• Benevolent dictatorship.
• Investors look over the shoulder of the Founder and management team.
• Founder's commitment tested.
• Work life put stress on family and home life.
• Negative cash flow.
• Under capitalized, or over-capitalized.

STAGE 2 - Go-Go

A Go-Go organization is a company that has a successful product or service, rapidly growing sales and strong cash flow. The company is not only surviving, it's flourishing. Key customers are raving about the products and ordering more.

Go-Go companies are like babies that have just learned to walk. They can move quickly and everything looks interesting. Fueled by their initial success, Go-Go's feel that they can succeed at almost anything that comes their way. Accordingly, they try to eat everything they touch.

Go-Go's are prone to rapid diversification and spreading themselves too thin. They have so many irons in the fire they cannot give the necessary attention to each one. They make decisions and commitments they should never have made, and they get involved in ventures that they know very little about.

Go-Go Companies Share These Characteristics

Sales Drive the Ship. The Go-Go company is sales driven and has an insatiable appetite for growth. More is better. Every opportunity uncovered in the marketplace must be pursued. This sales orientation is addictive. The company is opportunity-driven rather than opportunity-driving. It reacts rather than proacts to opportunities. In the rush to close the deal, agreements are sometimes signed before the company really understands if it can do the work. When profit measurement systems are later put in place, it often turns out that the Go-Go company increased sales by accepting new business that was unprofitable. Uncontrolled growth can become an abnormal problem that will jeopardize the continued development of the company. On the other hand, a premature focus on profitability can inhibit the long-term potential of the company.

Everything is a Priority. Strategically important tasks that are not urgent often get deferred to pursue the latest "hot" new project.

Management is Often Ineffective (and Frustrated). With their personal involvement in the day-to-day work of the company, Go-Go leaders often have little time to manage.

Information and Accounting Systems are Weak. The limited systems that do commonly exist in a Go-GO only support the basic needs of production/operations, customer service and accounting.

The Company Is Organized Around People and Projects. Responsibilities are assigned based on who can do the work on a project-by-project basis.

Employees are Frustrated. In the face of an overwhelming workload, unclear responsibilities and fuzzy goals, employees find it increasingly difficult to be productive. New people are hired and thrown into their jobs with little training or preparation. Physical space and proper equipment can be scarce because growth is difficult to predict. Promotions can occur on the spur of the moment. Later in Adolescence it often turns out that people promoted into senior management positions during Go-Go do not have the skills and experience needed to succeed in that position. Good people may leave when they are invited to join other compelling opportunities.

Infrastructure is a House of Cards. As the company continues to succeed, work processes, procedures and systems expand accordingly. The development of this infrastructure usually occurs in response to emerging opportunities or unexpected problems, rather than according to a long-term plan. As things become more complex, it takes longer to fix mistakes and some fixes create new problems because of unexpected side effects. Addicted to growth, the company cannot or will not slow down and take time to properly design and implement replacement systems. Instead, they make-do by enhancing or patching what is already in place. Miraculously, things still work, but just barely. Success increases the load on this house of cards. Instead of just hoping for a miracle, the people in charge of the infrastructure now begin to rely on that miracle.

Problems of Go-Go

• Self-confidence, eagerness.
• Everything is a priority?
• Sales drive the ship.
• Some sales accepted that we cannot deliver.
• Sales more important than profits.
• Unclear communications.
• Unannounced, unruly and unproductive meetings.
• Insufficient cost controls, ad hoc budgeting.
• Ineffective management from key leaders.
• Founder indispensable.
• Leadership is frustrated.
• No consistent human resources management.
• Confusion in roles and responsibilities.
• Employees are frustrated.
• Company subject to criticism.
• Infrastructure is a house of cards.
• Hope for miracles.
• A major crisis occurs.

STAGE 3 - Adolescence

During the Adolescent stage of the organizational lifecycle, the company is reborn. This second birth is an emotional time where the company must find a life apart from that provided by its Founder. This critical transition is much like the rebirth a teenager goes through to establish independence from their parents.

The Adolescent company teeters on the brink of both success and disaster. So long as the Adolescent company does well, investors and the Board regard the Founder as a genius with a golden touch.

Adolescence is an especially stormy time characterized by internal conflicts and turf wars. Everyone seems at odds with everything. Sales fall short or exceed production's estimates, quality is not up to customer expectations, and old timers plot against the new hires. Emotions are volatile and organizational morale traces a jagged line: ecstasy in one quarter, depression and dejection in another. Throughout the organization, people are busy tracking the real and imagined injustices they have suffered, which they nurse with great care.

Why is the transition from Go-Go to Adolescence so difficult? There are three principal challenges:

1. Decentralization of authority.
2. Change in leadership from entrepreneurship to professional management.
3. Goal displacement.

Decentralization of Authority

In moving to Adolescence, a Go-Go must transform itself from an absolute monarchy to a constitutional monarchy. It is rare that a king voluntarily yields his absolute powers. Such changes are (usually) accompanied by revolutions. The revolution erupts not just because the king loves power and does not want to relinquish it, but also because he has developed behaviors that are no longer be relevant, and he has trouble changing his behavior to fit the new environment.

Founders generally know that they need help managing their Adolescent organizations. They, and their families, are painfully aware that there is not enough hours in the day for them to still manage their organization as a one-person show. They want to decentralize, but fear loss of control and/or major mistakes.

Most Founders struggle to make this difficult leadership transition. In despair, they often bring in professional managers from the outside to take over the responsibility for decentralization, so that they can return to work they enjoy.

Change in Leadership-From Entrepreneurship to Professional Management

Bringing in a professional manager changes the leadership of the company. The new manager must be a real leader, not another gopher brought in to carry out the Founder's instructions. Their job is to take over from the Founder and drive the company to become more thoughtful and less intuitive in the way it manages itself. The Adolescent company must become opportunity-driving rather than opportunity-driven.

The new leader says "No! No! No!" to a company used to hearing only "Go! Go! Go!" from its Founder. It doesn't take long for the Founder and everyone else to discover that the new "hired guns" are not like them. The common reaction from a Founder is "This guy is not like me." "If I had run the company the way he does, we never would have gotten this far." Such logic can start a revolving-door syndrome where the professional managers get fired because they "don't fit in."

When the new "professional" managers come in they usually inherit a situation that is somewhat chaotic and disorganized. Everyone and his brother report to the Founder for one reason or another. The compensation system is a patchwork of special deals.

The power struggles are exacerbated by the behavior of the Founder who is the first to violate the new policies and procedures. The old-timers watch this "game." When the Founder sets the example with the first violation, they assume that all the new rules are subject to violation. Guess who gets called on the carpet to explain why the new budgets, rules, and policies are not being followed?

The pain of raising an organization in Adolescence is very real and often prolonged.

Displacement of Goals

A further complication is the need to transition to a new set of goals. In early Adolescence, company goals as well as the management information and compensation systems all generally reinforce the Go-Go's emphasis on growth and sales. In Adolescence, the company must change from the Go-Go's "more-is-better" goals to "better-is-more" goals. Profitability emerges as the most important goal for the organization. Instead of working harder, the Adolescent company must learn to work smarter. Growth and new sales are desired only to the extent that they also have higher profitability. Adolescent companies can end up reducing revenues for a period of time as the company pulls back from low margin business.

This significant switch in goals must be implemented through a complete overhaul of the structures, management information, resource allocation and reward systems of the Adolescent organization. This transition looks easy on paper, but in reality it is very difficult. Almost everyone in an Adolescent company wants the business to run more smoothly, but they do not see the problem as their own department." My department's fine. Go work on sales, that's where the problems are."

Problems of Adolescence

• Heated conflicts.
• Low morale.
• We/They infighting between newcomers and old timers.
• Temporary loss of vision and confusion of goals.
• Founder's acceptance of organizational sovereignty.
• Incentive systems rewarding wrong behavior.
• Yo-yo delegation of authority.
• Board of Directors' attempt to exert controls.
• Love-hate relationship between the organization and its entrepreneurial leadership.
• Founder struggles to change leadership style.
• Entrepreneuring roles monopolized by Founder.
• Infrastructure under upgrades and reconstruction.
• Insufficient delegation and decentralization.
• Lack of profit-based scheme.
• Rising profits, flat sales.
• Reduced emphasis on sales.

STAGE 4 - P.R.I.M.E.

P.R.I.M.E. is the optimal position on the lifecycle, where the organization finally achieves a balance between control and flexibility. P.R.I.M.E. is actually not a single point on the lifecycle curve. Instead, it is best represented by a segment of the curve that includes both growing and aging conditions. This is because flexibility and self-control are incompatible and there is no stable equilibrium. Sometimes the P.R.I.M.E.organization is more flexible than controllable, and sometimes it's not flexible enough.

These are the characteristics of an organization in P.R.I.M.E.:

• The organization is guided by the vision of its reason for being. There is a clear purpose and people know what they will do, and will not do, "they walk their talk".
• The company operates in a focused, energized and predictable manner.
• Stretch goals are set, aligned and consistently achieved.
• There is an enterprise-wide focus on customers and earning their long-term satisfaction. There is a high degree of customer loyalty. At the same time, the organization knows when and how to say "no" to the market. It is disciplined enough to protect itself.
• Priorities are clear. The organization knows what to do, and what not to do. It enjoys a certain composure and peace of mind when making tough decisions.
• The entrepreneurial spirit is fully institutionalized. Evidence of organizational fertility abound. This creativity repeatedly produces controlled, profitable innovation.
• Organizational structures work well. Opposing forces are balanced. There is alignment between vision, strategy, structure, information, resource allocation and rewards. A company in Prime is continuously realigning these subsystems.
• The infrastructure provides reliable support.
• The governance process is institutionalized. People know and understand where and how decisions are made.
• Decision-making is done is an environment of healthy, constructive conflict. Points of view are considered, but there are no hard feelings if one's recommendations are not heeded. Differences of opinion rarely deteriorate into personality clashes or turf wars.
• There is intra- and inter-organizational integration and cohesion with clients, suppliers, investors, and the community. This internal cohesion enables the Prime organization to devote much of its energy externally.
• People enjoy working at the company. Few willingly leave and there is a backlog of people applying for positions at all levels.
• They embrace change. Prime companies work hard to adapt to changes in markets and technology so that they can gain share from weaker competitors.
• They enjoy consistent, above average growth in both sales and profits.

Problems of P.R.I.M.E.

Senior management of companies in P.R.I.M.E.engage in a continuous struggle to maintain the delicate balance between flexibility and control. It takes very little to push a company in either direction. When administrators gain the upper hand, the company's balance swings in the direction of excessive control, and the company sacrifices flexibility. When entrepreneurs gain the upper hand, the company grows more flexible but loses control.

P.R.I.M.E.companies often don't have enough good people to run all their business units. The other key issue they face is complacency. P.R.I.M.E.is a temporary condition, not a permanent destination. Once you get there, the principal leadership challenge is to stay there. "Since everything is fine, why change?" This attitude is the first step into decline.

The greatest problem of P.R.I.M.E. is staying in P.R.I.M.E..

A company cannot simply reach P.R.I.M.E., sit back, and rest. Management must proactively work to promote activities that retard aging and sustain the vitality of P.R.I.M.E.. Vladimir Horowitz, one of the world's best-known pianists, once said: "If I do not practice a day, I notice the difference in my playing. If I do not practice a week, my wife notices the difference, and if I do not practice a month, the audience notices the difference."

STAGE 5 - Aristocracy

As organizations enter Aristocracy they characteristically:

• Are cash rich and have very strong financial statements.
• Have reduced expectations for growth.
• Demonstrate little interest in conquering new markets, technologies, and frontiers.
• Focus on past achievements rather than future visions.
• Are suspicious of change.
• Reward those who do what they are told to do and punish those who do not.
• Are interested in reducing their risks.
• Invest much more on control systems, benefits, and facilities than they do on R & D.
• Form dominates function in the organizational climate. More emphasis is placed on how things are done, than what was done.
• Value uniformity, consistency and formality in dress, decorum, and behavior.
• Employ individuals who are concerned about the company's vitality, but are willing to abide by a "don't make waves" operating motto.
• Engender only negligible innovation with internal efforts.
• Acquire other products or companies for new products, markets, and entrepreneurship to feed into their distribution channels and operating systems.
• May be takeover targets themselves.

The effects of the steady decline in flexibility, which began in P.R.I.M.E., start to become more obvious in Aristocracy. Because it has neglected to pursue long-term opportunities, the company's focus becomes increasingly short-term. For the most part, its goals are financially-oriented and low-risk.

With less of a long-term view, the climate in an Aristocratic organization is relatively stale. What counts is not what people do, but how they behave. Working within the system, supporting the status quo and not making waves, are the most important contributions. The actual accomplishments of its leaders, or lack of same, are becoming less and less important.

Aristocratic organizations exhibit a very characteristic set of behaviors. How people dress, where they meet, the facilities they own, how they speak to each other, handle conflict and make decisions are remarkably different from the other stages on the lifecycle.

Dress Code: In a start-up company, if you can do the work, you can wear your clothes inside out. By the time the company is a Go-Go, people start wearing suits and sport coats with ties, but there is no hard-and-fast dress code. PRIME companies require their people to be professional in the way they look and the way they act. By the time the organization reaches Aristocracy, only the requirement to look professional remains. The conservative uniformity of the Aristocratic culture is reflected in a conservative uniformity of dress. Everyone dresses as if going to a wedding or a funeral.

Meeting Rooms: In the boardroom of a typical Aristocracy, you will find a huge, highly polished, dark wood table surrounded by matching plush chairs. The carpet is thick. Lighting is subdued, and the windows are heavily draped. From the paneled walls, a larger-than-life portrait of the unsmiling Founder looks down on the room, as if warning everyone to remember his or her place. Ornate works of art cover the other walls.

Facilities: Opulent meeting rooms are just a part of the Aristocracy's investment in facilities. In the absence of low-risk investments to fund growth and research, Aristocracies invest in their facilities. They commonly build huge edifices that reinforce their exalted position in the marketplace. Just the square footage of the dramatic entrances and imposing empty corridors could adequately serve the space needs of several Infant companies. The president's suite, with its exotic wood paneling, private Italian marble bathroom, liquor cabinet, executive dining room, and adjoining secretary's office, probably cost more than the company paid for all its facilities back when it was a Go-Go.

How They Address Each Other: People in start-up and Go-Go organizations address one another by first names or nicknames. The names people use for one another in an Adolescent company are not fit for print. When an organization reaches Prime, both first and last names are commonly used. By the time the organization has reached Aristocracy, people speak to each other almost exclusively with last names. It's Mr. Smith and Ms. Jones. They may be Bob and Mary inside their offices, but in meetings, they address each other formally.

Verbal and Written Communications: In Aristocracy form is more important than content, the medium is the message. People speak slowly and softly, and overuse visual aids and written handouts. Extensive notes are taken that read like a trial transcript. During meetings, people hedge, using endless strings of double negatives and qualifiers. "It seems that, under certain circumstances it may be assumed, however, on the other hand, and not necessarily so, we might conclude that..." One leaves wondering what the person was really trying to say. If privately you ask someone to explain what the person was saying, he might tell you, "They said we are losing market share." "Well, why didn't they just come out and say that", you ask? They won't because that is not the way Aristocracies handle problems.

Dealing with Problems and Conflicts: The way managers of an Aristocracy deal with problems and conflicts is well illustrated in the film, The Garden of the Finzi-Continis. This 1971 classic examines the behavior of an aristocratic Italian-Jewish family just prior to World War II. When the Italian Fascists started to persecute Jews, the Finzi-Continis refused to believe that anything serious could happen to them. "We've been here for a long time," they said. "We are one of the most distinguished families in Italy." So they continued to play tennis behind the high walls of their estate, and eat in their chandeliered dining rooms, pretending that is was business as usual. While individually each member of the family was terrified, as a group life went on as always. Enchanted with their past, they were paralyzed to deal with their future. The group dynamics overpowered individual fears. The Aristocratic corporation behaves similarly. Hidden in their opulent high-rises, the managers of Aristocracies are individually worried about the company and their future. In meetings, however, none of them would think of assertively voicing their apprehensions. When a consultant confronts management and points to the threats, they are prone to reply, "Don't worry, we've been here long enough. They need us. We have a name, tradition, and know-how." Privately they may agree with the consultant, but publicly they will not support him.

In this way, leaders of Aristocratic company's collectively deny the current reality. While it is losing market share and increasingly incapable of competing, managers maintain their business-as-usual attitude. They feel obliged to sustain the company's track record. "We must distribute dividends. We cannot afford to disappoint the widows and orphans who trust us." To maintain this performance, Aristocracies generally increase growth and increase profits by raising prices and cutting costs. The constant price increases threatens customer loyalty and the Aristocratic company starts to become vulnerable. If it continues to raise prices, it is effectively throwing gasoline on its own fire.

Weak Decision Making: Leaders of Aristocratic organizations, whether in government or business, behave as if they have a great deal of control over their organizations. In private, they know that they can do very little, but in public they act as if they can do a lot. The truth is that there are so many committees that need to agree, and so many, many interests that need to be appeased, that it is almost impossible to implement any significant changes in an Aristocracy. Their leaders are limited to only what politics allow them to do. As their companies continue to age, this inability to have a real impact gets even worse.

The Silence Before the Storm

The product lines of companies in the advanced stages of Aristocracy are out-of-date. The clients know it, the sales people know it, and even the senior executives know it (privately). Yet the problems of the future are not yet pressing. The company is still liquid and profitable. Management holds endless meetings discussing the situation but nothing much happens. Everyone seems to be waiting for someone else to do something. Taking action now means making waves and becoming embroiled in political fights that may not be necessary. Who knows? Government policies might change, the competition could go broke, or our customers might change their tastes. Maybe these problems will all go away. It could happen.

Gradually the stale atmosphere of the Aristocracy is replaced with an impending sense of doom. Some companies try to lift morale by awarding gold medals for obscure achievements or by holding seminars in resort hotels where most of the time is spent vacationing, not working. Others deal with the overpowering sense of impending calamity by getting busy building even more elaborate facilities that are not needed. In an effort to save their necks, many people leave. Lacking attractive opportunities, those who cannot leave, accuse the deserters of disloyalty.

Desperate over continually declining market share, revenues, and profits, the Aristocratic organization enters Recrimination. This is not a gradual transition. It is quick and forceful. The Aristocracy has been covering its problems with price increases and acquisitions for a long time. The organization has expended all the goodwill it has so painstakingly accumulated from its Infancy. The artificial facelifts and price increases stop working because they are not a substitute for providing real new value and satisfying new market needs. The day of reckoning arrives when the financial reports finally reveal the true weakness of the company. The truth spreads rapidly. The company incurs the scorn of Wall Street. Stock prices drop like a rock, key accounts bolt to the competition and bankers won't return phone calls. When this happens, the gloves come off. Knives are drawn, and the fight for survival begins.

STAGE 6 - Bureaucracy

Although it should be dead, the company in Bureaucracy is kept alive by artificial life support. The company was born the first time in Infancy, it was reborn in Adolescence, and its third "birth" is in Bureaucracy when it gets an artificial continuance on its life. Death occurs when no one remains committed to keeping the organization alive. If there is no business or government commitment to supporting a company in Recrimination, death can occur instead of bureaucratization.

In the Bureaucratic stage, a company is largely incapable of generating sufficient resources to sustain itself. It justifies its existence by the simple fact that the organization serves a purpose that is of interest to another political and business entity willing to support it. The Bureaucratic organization:

• Has many systems and rules and runs on ritual, not reason.
• Has leaders who feel little sense of control.
• Is internally disassociated.
• Creates obstacles to reduce disruptions from its external environment.
• Forces its customers to develop elaborate approaches to bypass roadblocks.

Bureaucratic organizations accomplish very little of any value. Their focus is frequently on control for the sake of control. With no inclination to change, everyone's day is filled with systems, forms, procedures, and rules. People know all the rules, but they can't remember why they exist. If you ask why they do things in a certain way, managers in a Bureaucracy will likely tell you, "Because it's the policy." The response to almost any request is, "Write me a memo."

Bureaucratic companies are internally disintegrated. Each department has responsibility for a particular task, but no one has responsibility for the combined result of the separate tasks. It is usually up to the client to put all the pieces together. Employees don't know the inner workings of other departments. The customer service department often consists of telephone reps whose job it is to listen, record complaints, and answer them with a standard, routine letter: "We regret any inconvenience, but we will do our best to resolve your problem." Mostly they respond to customer requests by demanding yet another document.

Like an older person who follows a set routine every day and becomes highly aggravated with any change, Bureaucracies resent outside disruptions and aggressively create obstructions to limit them. Customers are an example of one such disruption. Bureaucracies minimize the possibility for external disruption by connecting to the external world through very narrow channels. Perhaps they allow only one incoming telephone line or they keep their customer service departments open for only a few hours a day. They keep people standing in lines, only to tell them which line they must go stand in next.

In a Bureaucracy, the left hand does not know what the right hand is doing. One department rejects what another one requests. Customers are puzzled, frustrated, and lost. To get results, a customer must build their own systems to deal with the ineffective organization. Businesses that must work with Bureaucracies usually have dedicated departments, systems and people that are experts on the inner workings of a particular government agency and getting the results they need from that Bureaucracy.

The health of a full-fledged Bureaucracy is very delicate. Although it appears to be a robust monster, it may be relatively easy to destroy it. Many are rotten to the core, teetering on the brink of bankruptcy. Since many of them get their financial resources from politicians, they survive only as long as they are political assets. When they become political liabilities and the funds are withdrawn, they can collapse promptly. Others are vulnerable to changes in laws, privatization, loss of corporate support.

Any sudden change could ruin them. Bureaucracies forced to confront these sudden changes, quickly, often don't survive the effort without considerable external support. This is particularly true for government-owned monopolies that are privatized. Many of these organizations have nothing in place that resembles marketing, sales or business development and so they quickly flounder in a competitive environment.

STAGE 7 - Death

Self-explanatory. No one is committed to sustain the organization any longer. Government and corporations who employ many people are kept alive artificially but are doomed to a long and expensive death spiral.

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