BusinessCompany NewsInsight: MBAs – Building a business to last.

Insight: MBAs - Building a business to last.

Multinational companies lasting 50 years have become a rare sight in business. But the key to longevity is simple. Adaptability and willingess to change are vital, as are valuable planning skills. Knowing how to effectively manage a business comes from years of experience, Stuart Penny argues in the essay that helped win him a £35,000 MBA scholarship, courtesy of Accountancy Age and business school Ashridge. But with the US favouring MBA candidates straight from university, which is the route to success?

In his book, The Living Company: Habits for Survival in Turbulent Times, Arie de Geus presents the findings of an investigation into the longevity of companies by Royal Dutch Shell. The findings are startling, indicating that the average life span of a multinational organisation – Fortune 500 or equivalent – is no more than 40 to 50 years. One third of the companies listed in the Fortune 500 in 1970 for example, had disappeared by 1983 – acquired, merged or broken to pieces.

What causes companies to enter these battles for survival? However you look at it, change triggers the survival battle – change within the company, how it operates, what it does, who runs it, what culture it adopts, the products it produces. Or the company remains constant and the world around it changes. Customer needs change, markets change, attitudes change, governments change, economies change.

Ironically, to grow, companies must also change. This is why growth in itself can be a threat to a company. We often say a company gets into trouble because it grew too fast. I would say it gets into trouble because its rate of change does not keep pace with its growth.

So battles for survival are inevitable, but the law of averages means that not all battles will have a successful outcome – but some can be avoided. As with many things in life, prevention is often better than cure.

By looking at the exceptional companies that have lasted much longer than the average 40 to 50 years, de Geus and his team were able to spot some common characteristics of long-lived companies. Companies like the Swedish Stora company that has its origins more than 700 years ago as a copper mine, and the Sumitomo Group whose origins reach back to the year 1590. Also DuPont, the Hudson Bay Company and Kodak.

Four key characteristics of long-lived companies are identified: they are sensitive to their environment, had a strong sense of identity, were decentralised or tolerant to fringe activities and conservative in financing.

If change is a trigger for company growth or decline, then having the foresight to identify change early must be good for avoiding trouble and capitalising on growth opportunities.

Corporate foresight may sound simple but it is actually hugely complex. It requires the management team to both look inward on the company and outward at the changing world.

The management team must continuously observe change and play out scenarios that examine the effects of the change upon the company. This is called planning in most organisations, but a plan that is put into action must be monitored and be dynamic enough to change in relation to further foresight from the management team. Having external views with regard to change can be critical.

But all the foresight and planning in the world is not enough on its own to prevent the ‘survival to growth’ battle. To do that, the management team must actually make the decisions to action their plans.

If a company has not had the foresight to avoid a problem, or has simply made the wrong decision, what practical measures can be taken?

Before considering practical strategies for survival, there is one rule that must be followed: the manager or management team must act rather than react. After 11 September, I had the foresight to see that there could be a downturn and decided to sell my IT business. This was positive, planned action. But when the sale fell apart, I was forced to react to the situation, make redundancies and ultimately merge the company. Had I contemplated failure earlier, my actions may have been different.

Most survival crises in companies manifest themselves in the form of a lack of cash. This usually triggers the inevitable cost-cutting exercise. But as our economy becomes more and more service and knowledge-oriented, this becomes increasingly difficult. The largest cost to many organisations today is the cost of people, so redundancies must be made. The problem really arises when you have made so many redundancies you no longer have enough people to deliver the service properly.

This leaves two main options: either downsize the company drastically, cherry-pick the best contracts and create a company of fewer people delivering key contracts, or grow. In reality there is likely to be an element of both options in any survival strategy.

The most common growth strategy is simply to sell more. The easiest sale is one to an existing customer with whom, you already have a relationship. However, this cannot sustain growth forever and new customers will be required. Gaining new customers involves a lot of hard work and can take a long time dependent upon your product or service.

Finding new markets may mean exploring other countries or identifying other people or organisations that can use your product or service. This demands considerable research because wrong decisions can be very costly and have dire ramifications for the business.

Innovation is essentially bringing a new product or service into existence to sell in either new or existing markets. Innovation carries its own very real risks – a lot of research and development expenditure will be needed. However, being innovative can lead to massive growth. After all, Dyson built a whole business out of one innovation, in a market that you would have thought was saturated.

Organic growth in companies often seems to slow as the company grows, the market matures or new products and services come to market. Merging with or acquiring another companies gives opportunities to increase market share, capacity and share costs. Of course, mergers and acquisitions involve considerable change and so bring with them the potential for failure and the possibility of being back in the fight for survival.

The final strategy is what I call the postmodernist approach to innovation. This involves taking the product, service or skills of the organisation and repackaging them. In my IT services business, I had a team of support people highly skilled in the technologies used in most office environments. The company generally used these skills to provide support services. But we repackaged them to provide a disaster recovery risk assessment service, opening up a new market for the company and also feeding the existing business model.

What about strategies for personal survival and growth? Running a company and going through the constant survival to growth battle is challenging, exciting and fun. However, it can also be draining, lonely and painful. Everyone has their own strategies for dealing with the challenges. Some of the current fashionable approaches involve mentoring or executive coaching. But I think it is all about learning, both through the experience of being involved and learning from others. So, the next time we encounter challenges we take actions based on hard earned experience.

Survival to growth is a continuous learning experience.

This is an edited extract of an essay by Stuart Penny, part owner of Miracle Services, and winner of a two-year Ashridge Executive MBA place, in a competition run by Accountancy Age and Computing

‘MANAGERS NOT MBAS’ by Henry Mintzberg is published by FT Prentice Hall.

It used to be the case that an MBA was a passport to a top job, but management education is going through something of a crisis – at least that’s the view of Henry Mintzberg, Cleghorn Professor of Management Studies at McGill University in Canada, writes Rachel Fielding.

The problem with conventional MBA classrooms, Mintzberg asserts, is that they overemphasise the science of management while ignoring its art and denigrating its craft, resulting in a distorted impression of its practice.

This is compounded by an emphasis among many US-based MBAs signing up young people with little or no experience, conventional programmes leave graduates with the false impression that they have been trained as managers. ‘Trying to teach management to someone who has never managed is like trying to teach psychology to someone who has never met another human being,’ Mintzberg claims.

That’s not all. By elevating management to the heady heights of a science, the MBA lulls students into believing a narrow and ultimately distorted view of management based on analysis, systematic decision making and the formulation of deliberate strategies. In reality, management is as much about art based in ‘insight’, ‘vision’ and ‘intuition’.

Mintzberg’s answer to the malaise is simple – an approach to management education that still, generally speaking, prevails in the UK – one that encourages practising managers to learn from their experiences.

Despite the effectiveness of the MBA marketing machine, a probe into the fate of Harvard alumni speak volumes about the reality of US-style MBA successes. Of 19 individuals identified as having ‘made it to the top’ in business, 10 seemed clearly to have failed (meaning that the company went bankrupt, they were forced out of the CEO chair, etc).

Look at it another way. Of the most admired managers in the US, a striking number don’t have MBAs. And MBA-led firms (Enron is a fine example) have plunged to disaster.

But all is not lost for the MBA, which, in the eyes of many, can compliment not replace an accountancy qualification. They may have lost their way, but what management education needs is insight, not ‘relevance’ and ‘practicality’. Above all we need to inject some passion by addressing the fascinating issues at the centre of contemporary business.

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