The Market Is Not Responsible For Your Results

One of my core beliefs is that no one is entitled to incumbency.

I can point to the turnover in the AmLaw 100, but to abstract from our industry is often more illuminating because no one gets defensive. In terms of understanding and analyzing enduring corporate cultures, probably no one is more qualified (certainly no one is better known) than Jim Collins, author of Good to Great and Built to Last, two of the best-selling business books of all time. (Yes, is the answer to your question: I've read and own both.)

The current Fortune magazine features the annual Fortune 500 and Jim Collins has contributed a valuable piece, The Secret of Enduring Greatness, which starts from this premise:

• Of the 500 companies that appeared on the first list, in 1955, only 71 have a place on the list today. (The 1955 list included industrial companies only, whereas today's list also includes service companies.)
• Nearly 2,000 companies have appeared on the list since its inception, and most are long gone from it. Just because you make the list once guarantees nothing about your ability to endure.
• Some of the most powerful companies on today's list - businesses like Intel, Microsoft, Apple, Dell, and Google - grew from zero to great upon entirely new technologies, bumping venerable old companies off the list. Robert Noyce invented the integrated circuit in 1958, three years after the first Fortune 500. Dozens of companies on this year's list did not even exist in 1955.
• Some of the most celebrated companies in history no longer even appear on the 500, having fallen from great to good to gone from the list - companies like Scott Paper, Zenith, Rubbermaid, Chrysler, Teledyne, Warner Lambert, and Bethlehem Steel - most often because they gave up their independence, and sometimes because they outright died.

The point, of course, is that there may be no such thing as "enduring greatness."

Separately, I've done my own analysis of the top 30 firms in the Fortune 500 over various time-frames and, if you'll permit me editorial license, the rough learning is that over any 20 year timeframe half the membership of the top 30 changes. I did the same analysis with the Dow Jones 30Industrials, and the result was almost spookily similar: From 1987 to 2007, 16 of the 30 DJIA firms were new.

So is building a firm for the ages not just a thankless task but a hopeless one as well?

Permit me to introduce some counter-examples. Procter & Gamble was founded in 1837 (1837—think about how long ago that was) to make soap and candles, by William Procter and James Gamble. Johnson + Johnson began on the fourth floor of a former wallpaper factory in 1886 by issuing a catalog full of antiseptic surgical dressings and medical plasters. Perhaps most famously of all, GE was started by the mercurial Thomas Edison but came into its own in the form of the GE we know today under Charles Coffin in the early 20th Century who essentially transformed GE into the professional management factory it remains to this day. 50 years ago GE was #4 on the Fortune 500; today it's #6.

Fine, you may be saying, those are exceptions that prove the rule that creative destruction dooms all within a generation or two. But not so fast.

The counterexamples may be few, but there are firms that have burst across the firmament, declined into near-irrelevance,and reinvented themselves for a second, and perhaps enduring, period of greatness. Exhibit A in this category is Xerox, one of the 1970's notorious "Nifty 50" (the 50 stocks you just needed to buy and hold forever, or so the common wisdom of the era had it--another was Polaroid, along with S.S. Kresge, Simplicity Patterns, and ITT, so judge for yourself). The Xerox story?

"Xerox, one of the great success stories in American corporate history, entered the Fortune 500 at No. 423 in 1963 and rose to No. 21 by 1990. But then the company began to falter as high costs translated into uncompetitive prices, and by 2001, Xerox had encountered a stock price that plummeted 92% in less than two years, decreasing cash, a falling market position, and an SEC investigation. Some questioned whether Xerox could survive as an independent company. Anne Mulcahy, who did not even make the initial list of CEO candidates, caught the attention of the board with her passion and dedication for the company and its culture. When Mulcahy became Xerox CEO in 2001, after working her entire career deep inside the corporation, she refused to destroy the company in order to save it. ("I am the culture," she said. "If I can't figure out how to bring the culture with me, I'm the wrong person for the job.") Churchillian in her belief that Xerox people could prevail against all odds, she refused to capitulate, refused to sell out, refused to acknowledge the inevitability of defeat. From losses of more than $300 million in 2000 - 01, she righted the company to more than $1 billion in profits in 2007."

Then we have the stories of the firms that don't change. Bethlehem Steel, once as high as #8 on the Fortune 500, lost its footing in navel-gazing at its own "byzantine structure" and never recovered from the challenges of firms like Nucor and, even, improbably, a revitalized US Steel.

Or consider the experience of Wells Fargo (emphasis supplied):

"Throughout history the greatest companies have used adverse times to their advantage. In the 1970s, under the farsighted leadership of Dick Cooley and Carl Reichardt, Wells Fargo created a culture of discipline years before deregulation upended the banking industry. It built a team of Spartans: cost-obsessed executives exhilarated by the prospect of fierce competition. When deregulation ripped away the protective cocoon that had enabled mediocre banks to survive, Wells Fargo pounced. It bought Crocker Bank, pulverizing its languid culture into the Spartan ethic."

The fundamental learning of Jim Collins after looking at firms that reinvited themselves and those that didn't?

It all depends on what you do to yourself.

It's not about the marketplace and it's not about competition. Although those environmental factors can change the landscape for you and your competitors alike, they tend to raise or lower all boats. The key is what you do.

The point is to practice creative destruction internally, as Andrew Carnegie did with Carnegie Steel. Yes, it's true that every solution to the market's demand for products and services eventually becomes obsolete. That doesn't mean the demand goes away, it merely ("merely," indeed!) means the supply solution changes.

Fundamentally, there is no intrinsic reason your firm can't adapt, even adapt ahead of the conventional curve, to supply the "new" solution. I leave you with these thoughts from Jim Collins:

"When you've built an institution with values and a purpose beyond just making money - when you've built a culture that makes a distinctive contribution while delivering exceptional results - why would you surrender to the forces of mediocrity and succumb to irrelevance? And why would you give up on the idea that you can create something that not only lasts but also deserves to last?

"The best corporate leaders never point out the window to blame external conditions; they look in the mirror and say, "We are responsible for our results!""

Published by Bruce at May 2, 2008 8:04 AM | TrackBack
Published to Finance | Leadership | Strategy