The lifecycle of businesses

[pbrower2a]

http://www.adizes.com/lifecycle/




So that I can provoke some thoughts about business in general. 

Courtship is the first stage of an organization's development. At this stage, the company is not yet born. It exists as a gleam in the Founder(s) eye. The focus of Courtship is necessarily on dreams and possibilities.

The primary goal of this stage is to build the Founder's enthusiasm and commitment to his dream. The higher the risk, the deeper the commitment needed. As Conrad Hilton said, "If you wish to launch big ships, you have to go where the water is deep."

In Courtship, it is normal to experience fear, uncertainty and doubts. What exactly are we going to do? How is it going to be done? When should it be done? Who is going to buy this and why? Now is the time to wind-tunnel test the brilliance of the Founder's vision.

The goal of the fledgling business should be to add value and satisfy market needs. Founders that are in it solely for the money, often don't have the fortitude to sustain their companies over the rocky road they will encounter in Infancy and Go-Go. A useful definition of a Founder is someone with; "unreasonable conviction in the face of insufficient evidence." By definition, most will think that the idea for the new business is risky, and probably won't work. It is not important that everyone else believes it will work. It is crucial that the Founder(s) believe it will, and are committed to doing whatever it takes to make the new company succeed.

Infancy begins the moment financial risk has been undertaken and the Founder quits her paying job, signs the loan documents or promises 40% of the company to outside investors.

Infant 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, Infant 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 Infant organizations is inconsistent. Unexpected crises appear with little notice. Because Infant 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 Infant companies for reasons that go far beyond money; and their loyalty to the team often extends beyond the struggling Infant's 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.

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. Even the investors are starting to get excited. With this success, everyone quickly forgets about the trials and tribulations of Infancy. Continued success quickly transforms this confidence into arrogance, with a capital A.

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. On Friday night the Founder of a Go-Go retail shoe business goes away for the weekend. On Monday morning, he walks into the office and announces, "I just bought a shopping center". This does not surprise the employees. It has happened before. The success of the Go-Go is the realization of the Founder's dreams, and if one dream can be realized, why not other dreams too? "What we did for shoes we can do for a whole mall". This arrogance is a major asset of the Go-Go, but when taken to an extreme, it is also how they get into trouble.

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. However, when the infrastructure collapses, sales slow down, costs mushroom or profits decline, the finger pointing begins in earnest. The Founder, accustomed to the magic of adoration, is instantly transformed into a goat who is no longer up to the task of leadership.

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. The Founder's safe conduct through this tempest is by no means guaranteed. If these conflicts are not resolved, Adolescent companies can find themselves in Premature Aging that can lead to the early departure of entrepreneurial leadership, or the professional managers leading to pathologies called Divorce or Premature Aging.


Prime is the optimal position on the lifecycle, where the organization finally achieves a balance between control and flexibility. Prime 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 Prime organization is more flexible than controllable, and sometimes it's not flexible enough.
These are the characteristics of an organization in Prime:

• 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.
  

So far, so good. But this halcyon era comes to an end.

[pbrower2a]

The Fall is positioned at the top of the Lifecycle curve, but it is not the place to be. That position is Prime, where organizational vitality is at its maximum. Companies that are in the The Fall phase have started to lose their vitality and are aging. When an organization first begins to age, the symptoms won't show up on its financial reports. In fact, the opposite is true. The Fall companies are often cash rich and have strong financial statements. Like medical tests, financial statements reveal a problem only when abnormal symptoms finally surface late in the Aristocracy stage. If you wait until the signs of aging appear in the numbers, the company will already be significantly aged. If you want to catch aging early, you must look elsewhere.

When people begin to age, the initial signs aren't apparent in their actions or bodies. Aging starts in their minds with subtle changes in attitude, goals, and their outlook on life. This is also true for companies. When an organization starts to age, the first place the symptoms appear is in the attitudes, outlook and behaviors of its leaders.

The leaders of The Fall companies are starting to feel content and somewhat complacent. This attitude has been developing for some time. The company is strong, but it is starting to lose flexibility. It is at the top of its lifecycle curve, but it has expended nearly all of the "developmental momentum" it amassed during its growing stages. The rocket is slowing down and starting to change direction and head down the lifecycle curve. The organization suffers from an attitude that says, "If it ain't broke, don't fix it." The company is losing the spirit of creativity, innovation, and the desire to change that brought it to Prime. It has sown the seeds of mediocrity. As the desire to change lessens, the organization mellows. There is less contention than in previous stages. More and more, people are adhering to precedence and relying on what has worked in the past. The company's dominant position in the marketplace has given it a sense of security. From time to time, creativity and a push for change surface, but such eruptions become less and less frequent. Order and predictability prevail. To avoid endangering success, people opt for conservative approaches.

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.
  

When an Aristocracy is unable to reverse its downward spiral and the artificial repairs finally stop working, management's mutual admiration society abruptly ends. The good-old-buddy days of the Aristocracy are gone, and the witch-hunts of Recrimination begin. Companies in this stage exhibit the following behaviors:

• People focus on who caused the problems, rather than on what to do about the problems.
  
• Problems get personalized. Rather than dealing with the organization's problems, people are involved in interpersonal conflicts, backstabbing, and discrediting each other.
  
• Paranoia freezes the organization.
  
• Personal survival and turf wars absorb all available energy leaving precious little to deal with the needs of customers or the world outside the organization.
  

The Witch Hunt

Everyone is busy trying to find out who caused the disaster. With blades drawn, it's backstabbing time in the boardroom. Like primitive tribes afflicted by extended drought or famine, there is a rush to appease the gods. The organization needs a sacrifice. Whom does it sacrifice? The fairest maiden, the finest warrior, or the cream of the crop? Typically, the management of a company in Recrimination sacrifices its most valuable and scarcest treasure.........the last vestiges of innovation and creativity. The company fires the EVP of Marketing, explaining, "We're in the wrong market with the wrong products and our advertising does not work." The heads of Strategic Planning, Business Development and Engineering are the next to find themselves on the street. "Our strategy does not work. Our acquisitions are not working. Our products and technology are obsolete." The people who get fired don't feel they are responsible for the company's situation. The Marketing VP often said that the company ought to change its direction. The strategist has an ulcer worrying about the lack of direction. Privately, these individuals complained, urged, begged, and threatened, but their efforts were like pushing wet spaghetti up a hill. Their exodus merely exacerbates the problem because these creative people are the indivduals the organization needs most for survival.

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.
  
  

Finally, when creditors pull the plug on infusions of cash, when clients choose elsewhere rather than deal with this company, when a government chooses to cease subsidies, along comes

Death when no one remains committed to sustaining the organization. Monopolies and government agencies that are quarantined from competitive pressure and provide a large employment base, often live long and very expensive artificially prolonged lives.

...Now my comment:


...This looks like a good model.

For a healthy economy, businesses need to be forming and going through growth stages while other businesses more 'advanced' in their lifetimes are in various stages of decline. The Bureaucracy stage looks like big trouble. Bureaucracy is not a good way to make a profit. Governments, monopolies, and businesses that basically shuffle paperwork (banks and insurance companies suggest themselves) can get away with bureaucracy. Maybe a creditor keeps a dying company around so that it can liquidate the assets for  a profit because land or intellectual property is worth more than the book value of the dying company. Maybe one dominant can get a key component cheaply enough until it finds an alternative in some other source.

There will be failures. Many businesses don't really take off. Some quickly fill a niche with no chance of growth even if the operation is profitable (think of a strip club). Some will face legal calamities or be robbed blind in embezzlement.

[radind]

The Adizes Corporate Lifecycle model looks good and provides a place to start discussion. One of my concerns is the large number of  government agencies in the bureaucratic stage. Until we find a way to overcome the bureaucratic tendencies, I would like to see old agencies abolished on some reasonable timeline( 25 to 30 years). New agencies could be started as needed to provide a totally fresh start(clean out the barnacles).
One example that comes to mind are the multiple national laboratories that were started in WWII era. They may each be doing wonderful work, but I think we could do with fewer of them  and don’t see the necessity for eternal life for such government agencies.

I did find a company with a different management structure. It will be interesting to see if this approach works long term and also see if this concept can be migrated to other organizations.

Quote:https://hbr.org/2011/12/first-lets-fire-...e-managers
First, Let’s Fire All the Managers

… "For decades the assumption has been that the work of managing is best performed by a superior caste of formally designated managers, but Morning Star’s long-running experiment suggests it is both possible and profitable to syndicate the task to just about everyone. When individuals have the right information, incentives, tools, and accountabilities, they can mostly manage themselves.”…

… "In most companies the hierarchy is neither natural nor dynamic. Leaders don’t emerge from below; they are appointed from above. Maddeningly, key jobs often go to the most politically astute rather than the most competent. Further, because power is vested in positions, it doesn’t automatically flow from those who are less capable to those who are more so. All too often managers lose their power only when they’re fired. Until then they can keep mucking things up. No one at Morning Star believes that everyone should have an equal vote on every decision, but neither does anyone believe that one person should have the last word simply because he or she is the boss. While management’s future has yet to be written, the folks at Morning Star have penned a provocative prologue. Questions remain. Can the company’s self-management model work in a company of 10,000 or 100,000 employees? Can it be exported to other cultures? Can it cope with a serious threat, such as a low-cost offshore competitor? These questions keep Rufer and his colleagues up at night. They readily admit that self-management is a work in progress. “Ideologically, we’re about 90% of the way there,” says Rufer. “Practically, maybe only 70%.”
I believe Morning Star’s model could work in companies of any size. Most big corporations are collections of teams, departments, and functions, not all of which are equally interdependent. However large the company, most units would have to contract with only a few others. With $700 million a year in revenues, Morning Star certainly isn’t a small business, but it’s not a humongous one, either. There’s no reason why its self-management model wouldn’t work in a much larger company”….

[pbrower2a]

(05-21-2016, 08:27 AM)radind Wrote: The Adizes Corporate Lifecycle model looks good and provides a place to start discussion. One of my concerns is the large number of  government agencies in the bureaucratic stage. Until we find a way to overcome the bureaucratic tendencies, I would like to see old agencies abolished on some reasonable timeline( 25 to 30 years). New agencies could be started as needed to provide a totally fresh start(clean out the barnacles).
One example that comes to mind are the multiple national laboratories that were started in WWII era. They may each be doing wonderful work, but I think we could do with fewer of them  and don’t see the necessity for eternal life for such government agencies.

I did find a company with a different management structure. It will be interesting to see if this approach works long term and also see if this concept can be migrated to other organizations.

Quote:https://hbr.org/2011/12/first-lets-fire-...e-managers
First, Let’s Fire All the Managers

I am tempted to say that bureaucracy is the sophisticated and civilized way to do nasty and primitive things to people.

Few organizations, perhaps insurance companies excepted, begin with bureaucracies in place. Even banks started off in most cases as cottage industries in which the owner made most of the decisions. Bureaucracies are money-eaters, and they rarely produce much. It is hardly surprising that Adizes has bureaucracy as the final stage of life of many organizations. They are good at controlling things, but what they control is often suspect.

Not all government agencies are bureaucracies. School districts typically have a high ratio of teachers to administrators.

[radind]

(05-21-2016, 09:23 PM)pbrower2a Wrote:

(05-21-2016, 08:27 AM)radind Wrote: The Adizes Corporate Lifecycle model looks good and provides a place to start discussion. One of my concerns is the large number of  government agencies in the bureaucratic stage. Until we find a way to overcome the bureaucratic tendencies, I would like to see old agencies abolished on some reasonable timeline( 25 to 30 years). New agencies could be started as needed to provide a totally fresh start(clean out the barnacles).
One example that comes to mind are the multiple national laboratories that were started in WWII era. They may each be doing wonderful work, but I think we could do with fewer of them  and don’t see the necessity for eternal life for such government agencies.

I did find a company with a different management structure. It will be interesting to see if this approach works long term and also see if this concept can be migrated to other organizations.

Quote:https://hbr.org/2011/12/first-lets-fire-...e-managers
First, Let’s Fire All the Managers

I am tempted to say that bureaucracy is the sophisticated and civilized way to do nasty and primitive things to people.

Few organizations, perhaps insurance companies excepted, begin with bureaucracies in place. Even banks started off in most cases as cottage industries in which the owner made most of the decisions. Bureaucracies are money-eaters, and they rarely produce much. It is hardly surprising that Adizes has bureaucracy as the final stage of life of many organizations. They are good at controlling things, but what they control is often suspect.

Not all government agencies are bureaucracies. School districts typically have a high ratio of teachers to administrators.

I have no experience working in any school system. My experience is with the federal government which has many bureaucracies.

[pbrower2a]

Public schools are among the most efficiently-run of all public institutions. Teaching is ill suited to micro-management , something that usually gets bad results. Bureaucracies would cost huge amounts of money, and in rural areas that just would not be tolerated.

I've been a substitute school teacher, and you would be surprised at what I can learn about education as a process. So long as I stick to the lesson plan I am OK. I'm the authoritative type, someone who knows what he wants to achieve on any given day and usually achieves it. I get on topic and stay on topic, but I can adjust. Students do what they are told to do, and if they struggle I help them with their struggles. I decide what they are going to get away with and what they are not going to get away with.

My idea of a good day is that I have no disciplinary referrals, that kids actually learn something, and that the day that I have is simply normal.

... Back to the issue of bureaucracy: small businesses do not have it. America became the economic success that it is because of small business. Governments seem to like big business because big business has payrolls and real estate to tax. Some parts of Big Government love Big Business because it pays into campaigns and into lobbying groups.

[pbrower2a]

Harvard Business Review has a scathing article on once-revered icon of American business General Electric.

Quote:The General Electric story, of a long-proud initial member of the Dow Jones Industrial Average falling out of that index — and appearing to be in competitive free fall — provides a powerful illustration of two effects we see throughout today’s corporate world: clueless, but deep-pocketed, activist investors and mergers and acquisitions folks masquerading as strategists.

GE’s fall accelerated on October 25, 2015, with activist hedge fund Trian announcing a $2.5 billion equity investment in GE stock, one that made it a top 10 shareholder. GE stock was trading at $25.47 at the time of announcement, with a dividend of $0.92 per share. Trian announced that with its help, GE could look forward to a stock price in the $40–$50 range by 2017, and threatened a proxy battle unless GE put Trian cofounder Ed Garten on the board. In June 2017 longtime CEO Jeff Immelt resigned under unrelenting Trian and shareholder pressure, and John Flannery took over as CEO. Four months later Garten joined the board.

During the Immelt era, the dominant mode had been of strategy by way of mergers, acquisitions, and divestitures (MA&D), including most recently the disastrous merger of the GE oil and gas business with Baker Hughes in 2016. In the fall of 2017 under Flannery, MA&D unsurprisingly became GE’s turnaround strategy tool. Along with a surprise halving of the dividend, Flannery announced a review of the portfolio that would see the divestitures of numerous historic GE businesses, which ended up including light bulbs, appliances, and locomotive engines.

The approach of seeing strategy as the act of rejuggling one’s corporate portfolio of businesses is common in the large modern corporation. Many have strategy heads, who are ex-dealmakers at investment banks, whose default assumption is that if the company has a performance problem, the natural fix is to buy and/or sell something. The idea does not naturally come to mind that perhaps the problem is an uncompetitive value equation with customers. The result is a boon for the private equity business, which gets to buy underperforming corporate divisions for a song and turn them around at a huge profit, and for the sellers of growth businesses, who get paid crazy multiples of earnings and sales for businesses that are purchased to generate growth for big companies that are, on their own, incapable of organic growth.

It is not as though MA&D can’t help strategy. It can when the moves are designed to help improve the value equation delivered for the customer — like Google buying Android, or Facebook buying Instagram, or P&G buying Tambrands. But for a business that is struggling with growth and/or profitability, MA&D is not going to be of assistance if it distracts management’s time from fixing the core customer value equation problem — and it almost inevitably distracts. That is one reason why so many acquisitions are abysmal failures: They are distracting Hail Mary attempts. Take, for example, News Corporation getting into the exciting internet space by buying MySpace, or Microsoft into smartphones with Nokia, or HP into software and services with Autonomy — all written off virtually in their entirety.

More at the source.

I think that we can see a once-venerable company headed into a death spiral. It makes bad, desperate decisions that work out badly.  Some of these mergers suggest an aging tiger eating a healthy young lamb and expecting rejuvenation from the meal. The tiger is getting nothing more than a meal; it won;t gain any vitality.The lamb of course is no more.

See also Sears.

[pbrower2a]

Death often comes to a once-vibrant and profitable company after that company divests itself of its most valuable assets just to stave off bankruptcy. It rarely works. Maybe nothing can. See Sears today, after it sold off Kenmore and Craftsman.

Sears, 1892-2018.

How long has it been since you were excited about going to Sears?

The 'vulture sales' begin soon.

[David Horn]

(07-03-2018, 10:41 AM)pbrower2a Wrote: ... I think that we can see a once-venerable company headed into a death spiral. It makes bad, desperate decisions that work out badly.  Some of these mergers suggest an aging tiger eating a healthy young lamb and expecting rejuvenation from the meal. The tiger is getting nothing more than a meal; it won;t gain any vitality. The lamb of course is no more. 

The era of shareholder value being the sole driving force in business has been an unmitigated disaster.  Until it's resolved, more of this will go on until we cannibalize our entire economy to benefit the very, very few.  It's 40 years and counting already.  Even allowing for the massive wealth and power of our corporate community, it can't continue forever.

[pbrower2a]

(05-21-2016, 08:27 AM)radind Wrote: The Adizes Corporate Lifecycle model looks good and provides a place to start discussion. One of my concerns is the large number of  government agencies in the bureaucratic stage. Until we find a way to overcome the bureaucratic tendencies, I would like to see old agencies abolished on some reasonable timeline( 25 to 30 years). New agencies could be started as needed to provide a totally fresh start(clean out the barnacles).
One example that comes to mind are the multiple national laboratories that were started in WWII era. They may each be doing wonderful work, but I think we could do with fewer of them  and don’t see the necessity for eternal life for such government agencies.

I did find a company with a different management structure. It will be interesting to see if this approach works long term and also see if this concept can be migrated to other organizations.

Quote:https://hbr.org/2011/12/first-lets-fire-...e-managers
First, Let’s Fire All the Managers

… "For decades the assumption has been that the work of managing is best performed by a superior caste of formally designated managers, but Morning Star’s long-running experiment suggests it is both possible and profitable to syndicate the task to just about everyone. When individuals have the right information, incentives, tools, and accountabilities, they can mostly manage themselves.”…

… "In most companies the hierarchy is neither natural nor dynamic. Leaders don’t emerge from below; they are appointed from above. Maddeningly, key jobs often go to the most politically astute rather than the most competent. Further, because power is vested in positions, it doesn’t automatically flow from those who are less capable to those who are more so. All too often managers lose their power only when they’re fired. Until then they can keep mucking things up. No one at Morning Star believes that everyone should have an equal vote on every decision, but neither does anyone believe that one person should have the last word simply because he or she is the boss. While management’s future has yet to be written, the folks at Morning Star have penned a provocative prologue. Questions remain. Can the company’s self-management model work in a company of 10,000 or 100,000 employees? Can it be exported to other cultures? Can it cope with a serious threat, such as a low-cost offshore competitor? These questions keep Rufer and his colleagues up at night. They readily admit that self-management is a work in progress. “Ideologically, we’re about 90% of the way there,” says Rufer. “Practically, maybe only 70%.”

I believe Morning Star’s model could work in companies of any size. Most big corporations are collections of teams, departments, and functions, not all of which are equally interdependent. However large the company, most units would have to contract with only a few others. With $700 million a year in revenues, Morning Star certainly isn’t a small business, but it’s not a humongous one, either. There’s no reason why its self-management model wouldn’t work in a much larger company”….

With few exceptions, government is bureaucratic. Any government agency has elected officials to whom it is ultimately responsible and rigid rules on the expenditure of assets. Misappropriation of funds is a serious offense for which one can be fired and even co0nvicted. It is not up to a government employee to decide that some different way of allocating funds is more efficient; that is set in Washington DC, a state capital or the city or county administration. Any one of those can make a highly-centralized decision that wastes money or demands that the same solution be applied to Boston, Texas (there is such a place) as to Boston, Massachusetts. A business might decide that using pencils until people can barely handle them is more efficient or issue the edict "stop wasting paper clips". Or it can dictate routes for people traveling on company business to shave a couple miles off the compensation for mileage. 

At times there are good reasons for rigid rules, as in a prison or the military, where deviations from the rules can lead to lethal disasters.   

Government agencies do not exist to turn a profit. Any government agency that can turn a profit is suspect as a rightful role for government. We don't want the government owning and operating profitable enterprises, do we, if it is not a natural monopoly? Bureaucracies seem to be born with a sort of progeria in which they are old in their functioning even if they were formed lately, as with government agencies of any kind and such for-profit bureaucracies as insurance companies. Predictability is far more important than is innovation.

All government agencies would shrivel and die (except perhaps for some municipally-owned utilities) were it not for the funds from taxes.

[pbrower2a]

(10-11-2018, 11:59 AM)David Horn Wrote:

(07-03-2018, 10:41 AM)pbrower2a Wrote: ... I think that we can see a once-venerable company headed into a death spiral. It makes bad, desperate decisions that work out badly.  Some of these mergers suggest an aging tiger eating a healthy young lamb and expecting rejuvenation from the meal. The tiger is getting nothing more than a meal; it won't gain any vitality. The lamb of course is no more. 

The era of shareholder value being the sole driving force in business has been an unmitigated disaster.  Until it's resolved, more of this will go on until we cannibalize our entire economy to benefit the very, very few.  It's 40 years and counting already.  Even allowing for the massive wealth and power of our corporate community, it can't continue forever.

Such has been an assumption with joint-stock companies since DuPont Corporation first went into business over 200 years ago. This is the oldest business in America that was born a giant business, largely as a government contractor to supply munitions for the armed forces of the fledgling United States of America. What is good for profit is good, and executives know this well. When the funds are flowing well, such makes growth more important and liquidity less precious. When profits start to shrink, then liquidity is everything. That is the distinction between a 'growth' stock and an 'income' stock. 'Growth' stocks typically represent relatively new firms, and 'income' stocks are more likely a few decades away from the end of the line if they do not have captive markets. 

It is easy to see giant businesses as models of efficiency, but the Adizes model suggests that efficiency decreases as a company gets larger, needs more internal controls, and is responsible to shareholders who scream bloody murder if earnings per share shrink. Figure instead that a mom-and-pop business has adequate controls (a family owner running the cash register is nearly ideal if that family member has no cause [such as a drug habit or a proclivity for conspicuous consumption] for filching the money). If it can save money on office supplies... well, it doesn;t have much of an office and has no dedicated office staff, anyway).  

OK, no company makes a profit off its internal accounting or its personnel department, but it might develop more and better products or streamline operations if it has a solid engineering department, and can get a larger sales volume with more effective marketing. Fine -- but with that comes more bureaucracy. Bureaucracy loads costs without generating revenue or developing new products. It is practically impossible to determine what bureaucrats are doing real good and which ones are not doing real good. Efficiency in doing long-term damage can look like a virtue.

Small business does not have a bureaucracy because it cannot afford one. It typically has other problems like limited revenue and a capricious cash flow. 

... So how does this relate to generational theory? Optimally the economy is seeing small businesses form at all times, with some of them becoming big businesses, and the lean operators taking over for the high-cost operators as the latter find their costs catch up to revenues.   Many companies have a natural lifecycle of the sort that can reward young, energetic workers who latch onto them in the go-go phase to find themselves with responsibilities that grow with their increasing competence and become more bureaucratic as the original employees become less flexible and imaginative in their 40's and 50's and maybe have some profits with which to fund pensions for retirees. Had I had a choice between Hewlett-Packard around 1980 or Sears I would have definitely chosen Hewlett-Packard. To be sure there are companies that die due to incompetence, poor decisions (Braniff Airways), or even malfeasance (Enrob Corporation, as I love to call it), but most fail due to irrelevance. I remember someone talking about the demise of Montgomery-Ward on a news program... only to make the question "when did you last shop there?"

From the standpoint of tax revenues for state and federal governmentsneither infant entities nor dying entities generate much revenue through income, sales, or payroll taxes. Go-go companies may be starting to churn revenue, but they are also buying equipment and buildings suited to rapid depreciation of sunk costs.  Companies in the prime and "fall" companies are generating maximal profits, have their peaks in sales volumes, and their highest payrolls in relative terms,. Aristocratic companies are living off past glory, but for them the taxes are becoming a real burden. In bureaucracy, costs are rising faster than revenues, and taxes are becoming a crippling burden, real sales volume is shrinking in contrast to the glory days, and payrolls are shrinking. A company may be resorting to debt service to keep it afloat, and debt service becomes a cost that does nothing but fend off the inevitable. 

If many companies are in the death spiral of the recrimination (when things are starting to fall apart) and bureaucratic stage, but few are going from go-go into maturity... then just think of how messed-up the overall economy can be.

[pbrower2a]

So why does a company like K-Mart or Sears remain in existence once it is no longer a going concern? It may have valuable assets such as real estate or fully-depreciated machinery still useful. A publishing house or recording company might have copyrights written off as assets but still useful. A company might own a patent or have some resources after depletion allowances are exhausted. It may have a loyal customer base desirable somewhere else (My Montgomery Ward credit card basically became a Wal*Mart credit card, as Montgomery Ward and Wal*Mart customers have similar demographics) Creditors can at times recognize this, and they may decide that a company that it is better that some operations that might not turn a profit might pay costs of taxes and maintenance.

The company may be dependent on others for existence. It could be the supplier of a component that its clients need, and its customers allow it enough revenue to limp along until the client finds another source or an in-house solution.

[pbrower2a]

Having brought material from this thread into another discussion, I would like to revive it.



This is microeconomics, but we need also look at macroeconomics. Where the bulk of companies are as a share of the economy matters greatly. Start-ups are rarely profitable enough  to tax directly. Employees are often living heavily upon promises of an employer and (if young) raw talent. Firms in this category typically own few assets that can be taxed, and their payrolls are small.  Research and development matter more than unavailable quick income. This is almost the same in "go-go" companies. In adolescence, profits are starting to become significant, and a company needs to find better facilities as its customer base, production, and cash flow increases. 

Plenty of traps exist for companies in infancy. Maybe the innovative object of commerce goes obsolete before the company takes off. Nobody has any idea of what to do then, so the company makes one blunder after another that eats its assets. As a biological analogy, adult alligators eat dogs, but dogs can eat baby alligators easily.  Perhaps lacking funds but looking sort-of-OK as an acquisition its owners get an offer that they can't refuse from a company already past prime. The ideal situation and temptation is that the older and less flexible firm adds some infusions of cash into processes and finds the promising talent useful in giving the older and larger corporation a new lease on life. The new division is full of bulls in china shops who ill fit a company that has rigid rules and a staid culture. 

At best, companies through adolescence are the future for the economic health of the overall economy. They are not the basis for current prosperity through public investment. Payrolls are small, and many of the employees are being paid in promises (like cheap stock) instead of cash. 

Prime is best. People are still able to get ahead if they have genuine talent, and cash flow is getting significant. Businesses in prime start to concern themselves with image, and they need to have buildings that look good to potential customers. Payrolls are larger both in income per worker and head-count, so employers are easier to tax by taxing authorities. These companies start to have nicer buildings and thus end up paying more in property taxes that fund public services from schools to streets to schools. The payoff in public investment in schools that educated workers in such places is significant enough to allow a consumer economy. People start to be paid well, so the consumer economy blooms. 

Obviously to get companies in this range one needs to have had a healthy number of start-ups that have evaded the problems of under-capitalization, poor planning, and weak markets.  A social order that offers little opportunity for starting new businesses or that dedicates its resources into something unlikely to result in economic growth (think of the Silent generation for largely starting professional practices and government contractors or put their entrepreneurial skills largely into investment banking), then there would not be much business in the prime zone about twenty years after the Silent start entering adulthood. By the late 1970's that alone would create economic stagnation.

Companies at their peak have good financial statements, but they are losing their entrepreneurial qualities. They lose their flexibility and their ability to innovate. Everything becomes a matter of spending money to solve problems, and there is plenty of money to invest in such. They are easy to tax, as they have high profits and attractive buildings. Governments collect income and property taxes, and employees are being paid well. These companies  have nice buildings for property-tax assessment. But this peak is where Adizes sees the Fall. After this comes the downward spiral. 

Aristocratic companies have reduced expectations of growth. They reward executives lavishly for doing what they have been doing successfully. Innovation becomes a threat to entrenched executives. They become conformist in behavior and style. Dress codes may be imposed. The firm often looks at limiting risk instead of innovating and seeking growth. More concern goes into controls, benefits, and edifices than into research and development. They tend to not attract promising young employees who might make waves. 

Competitors start outpacing them. Their patents and other intellectual property start to expire or become irrelevant. Too many people are overpaid because these companies cannot find innovative people.  Problems built into the company continue to grow, and they may merge with the systems of control so that the problems are hard to cast off. Some lines become unprofitable but can't be shucked off. 

... If a huge share of businesses are in this area, then the age of economic stagnation is nigh.

In recrimination, companies that have started the decline as aristocratic entities  start to see problems, and usually cast off the people most likely to solve those problems. People in R&D, marketing, and finance find themselves the targets of back-stabbing. In recrimination, the vitality of the company is in an undeniable tailspin. The best that the leaders of a company in this stage can hope for is a personally-soft landing. Profitability once formidable has been gutted. The firm may be more concerned with survival by connecting to entities that depend upon it having a bloated payroll, property to tax, and a need for the stuff for which that company may be the last remaining survivor. Its productivity is slight but its bureaucracy dominates everything. Politicians on the Right need the campaign contributions. Politicians on the Left need to keep this company's employees on the payroll so that those employees have cause to vote.  Institutions may depend upon their meager dividends for stability.  Many are government contractors who depend upon huge requisitions as contracts; these could never survive in a free market. These are the companies "too big to fail" but perhaps even worse, "to corrupt to save" or "too inflexible to survive". These are the first companies to go under in an economic collapse and might be saved only with huge infusions of cash that might otherwise better go elsewhere.

This often has connections to the generational cycle. A business lifecycle may fit an employee. If one has legitimate talent then one obviously wants to latch onto a company with growth potential early. Just because a company is profitable may not mean that one is a smooth fit. One may lack the "polish" appropriate for a company at or just after the peak and one cannot learn that on the job. As one proves oneself one participates more in the consumer economy and perhaps takes out a mortgage loan on a house and starts having a genuine family of one's own. One quits buying elderly and decrepit used cars and buys new ones. Stability of income becomes more important as one has college-age kids who better suit white-collar than blue-collar work (and much blue-collar work requires considerable training now, so that may not be much of a distinction). A company in control of its assets may be better for one at that stage of life than one with unlimited potential for business growth as might a start-up.  If one hasn't wrecked one's body with obesity, drugs, booze, tobacco, and reckless sexuality, then at age 55 or so all that matters is that there be a good retirement plan and that one survive there until one retires.

It also relates to the overall economic cycle of the Saeculum. The solutions to most economic needs is start-up companies to which talented people can latch onto and grow, and when government favors something else (like speculative frenzies near the end of a 3T or crony capitalism at any time that favors entities Too Big to Fail, Too Inflexible to Survive, or Too Corrupt to Save), then the economy is on the brink of bad times. Businesses fail and tax revenues plummet as people lose their jobs and cannot find new ones. If too many people have been working for firms that are in the stage of bureaucracy, then impressive payrolls disappear and people often too inflexible to start over become a large volume of the Unemployed.

[pbrower2a]

I can propose a connection between the cycle from the end of the last Crisis Era to now. Small-business formation would seem to peak in the low times of a 4T -- before the Crisis is at its most ferocious. Once social disruption from a big shooting war (Civil War, WW II) or mass-killing epidemic (COVID-19 has caused war-like casualties while disrupting the overall economy) the formation of new small businesses is tricky. When the time of Milk and Honey begins at the end of a Crisis, start-up businesses are not so attractive when work is steady and pay is reliable. Notice that the one thing that the Silent did not do was to start small businesses in large numbers aside from professional practices. (Professional practices pay their owners well, but once established they offer little potential for growth in employment or sales volume).

The Silent had relatively few high-profile business-formers: Warren Buffett (buy-and-hold purchases of businesses that could be nudged a little), the Koch brothers (buying up unglamorous operations cheaply), T. Boone Pickens (oil wildcatting), Michael Milken and Carl Icahn (vulture capitalism), Ted Turner (broadcasting), Ross Perot (government contracting), and Dave Thomas (fast food). The Missionaries (especially in supermarkets), the Lost, GI's, and even Boomers did more to establish. X, in contrast to the Silent, typically saw formal education more costly than it paid off and the meager pay and low glass ceilings in Corporate America unpromising, and was much more likely to start new businesses.
(aside from professional practices) than the Silent.

Figure that lots of large businesses going toward the Recrimination and Bureaucracy phases going into the Double-Zero decade without lots of business entering or in the mature phases (which also shows in inadequate tax revenues for government to keep things from falling apart) created a mess in its own right. Around 2000 the businesses in Prime and Peak areas were rare because the Silent had not formed those that would be strong generators of prosperity. The businesses in America were either immature or in terrible declines. The Crash of 2008 partially reflected that.