How to ensure the long-term growth or evolution of your business
REVISED OCT 31, 2022
If your business is either growing, scaling or evolving, i.e. changing and you want to ensure that you are leading sustainable change, there are certain considerations that you need to be aware of and act upon. Here they are.
Corporate Life Cycle
According to Aswath Damodaran, Professor at NYU Stern, the Corporate Life Cycle has six stages: Start-up, Young Growth, High Growth, Mature Growth, Mature Stable, and Decline. Businesses do not like to get old, but ageing is inevitable. Therefore, they must modify their focus as they age.
If they do not, their life cycle will be shorter. And a business valuation should reflect this. A lot of value is destroyed by businesses not acting their age. Young companies try to act old and old ones try to act young. Many consultants and investment bankers tell them that it is the right thing to do.
Professor Damodaran provides some guidance on stage and focus. We think that it is useful, but it is not always straightforward to guess them. Nevertheless, it is important that business leaders make an honest assessment, communicate it to stakeholders and act accordingly.
According to Geoffrey West of the Santa Fe Institute, most companies disappear after 10 years. Only a few make it over 100 years, with even fewer making it over 200 years. The longest surviving companies are relatively modest in size and are highly specialized, operating in niche markets.
To scale, i.e. to achieve more efficiency, market share and earnings, companies add rules, regulations and protocols. At the expense of innovation: their dimensionality continually contracts, eventually stagnating. Dimensionality here means the space of opportunity, the space of functions, and the space of jobs.
Unlike companies, people or organisms, cities do not seem to die. We agree with West – companies should look at more open organisational models, considering how cities are run.
We believe that to scale and extend the corporate life cycle, i.e. to change sustainably, businesses need to be adaptive organisations that manage:
- The traditional drivers (financial) of value, such as Sales, Earnings, Investments (projects) and Cost of Capital to increase shareholder value over time, rather than short-term profit
- The traditional drivers (strategic) of value, such as the strategy (non-financial goals), leadership, structures, roles and behaviours to maintain an innovative organisation
- The new drivers of value – the Environmental, Social and Governance (ESG) factors to increase stakeholder value over time
Adaptive organisations: the three pillars of sustainable change
All the points above are valid for both young and old businesses. At present, start-ups seem to think ESG factors are something for older businesses. To be fair to them, in the past, most start-up funders, especially the most critical ones, i.e. VCs, did not care about ESG. However, now some do. Soon more will follow as they (like the later-stage asset managers) are increasingly managing younger people’s money. The kind of people who care about ESG.
I worked on projects (change) all my life, for large and small businesses. Some delivered the expected benefits (financial and non) and others exceeded expectations. A few did it on time and on budget, while others did not. Some failed. I learned the most from failed projects. Project failure is not a bad thing that must be avoided. Failed projects are part of changing the business. A business either does not change and dies early – or fails projects fast, learns, changes and grows old.
Businesses, especially larger ones, should manage their change portfolio the way the best VCs manage their investment portfolio: make sure you have a few stars that deliver not only the *expected portfolio return* above the cost of capital of the company but also the *expected portfolio impact*.
For more, see the article Sustainable change: the new model for value creation I wrote for the CISI Review.
To learn how we can help your businesses grow or evolve sustainably: