Sustainable Change: an alternative model for growth

How do you ensure the long term growth or evolution of your business?

Sustainable change

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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.

The 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 general guidance on stage and focus. We think that his guidance is very useful, but it is not always straightforward to identify the stage and focus of a specific business – its leaders still need to make judgment calls.

The Scaling Problem

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 that companies should look at more open organisational models, considering how cities are run.

Sustainable Change

We believe that to scale and extend the corporate life cycle, i.e. to change sustainably, companies need to:

  • Better manage the scope of their market, functions and jobs, keeping the simplest organisational model possible for the life cycle stage they are in – if in doubt err on the side of simpler
  • Manage the long-term value of the business, rather than the short-term profitability of the business, but remember that cash is always king
  • Include the Environmental, Social and Governance (ESG) factors in their valuation, especially if they are at an earlier stage of the life cycle

The last point does not mean old companies can ignore ESG factors. (They should not!) It does emphasise young companies cannot ignore them. 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. And soon more will follow as they (like the later stage asset managers) are increasingly managing younger people money. The kind of people who care about ESG.

Final thoughts

Just like for people, change, let alone sustainable change, is not easy at any stage of a corporate life cycle, but it gets less and less easy with age. I worked on projects (change) all my life for large and small businesses. Some delivered the expected benefits (financial and non), others exceeded expectations. A few did it on time and on budget, others did not. Some failed.

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 die fast or fail projects fast, learn, change and grow old.

Larger businesses, in particular, 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*.

(I leant the most from failed projects.)

 

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