Longevity of the firm and zombie corporations

May 20, 2016

longevity_kanjiIn stark contrast to say, The Netherlands, France bemoans the moment one of its home-grown emerging champions gets acquired by a foreign company. [I have a whole blog post in my head on just this topic alone]. Corporations are viewed in France as containers of jobs, with the obligation to provide secure employment to its workers. Secure employment requires that the corporation remain a going concern on a profitable basis, indefinitely.

However, in order to survive corporations must continue to offer products that meet a market demand. A corporation whose products no longer have a market must adapt (such as by joining forces or optimizing its cost structure), or innovate (such as by creating new products or tapping new unmet demand).

Both require flexibility. This is the fundamental tension at the source of the current hand-wringing over proposed labor reforms in France.

Even for companies that aren’t arguably hamstrung by rigid labor laws, one of the compelling questions of our day is whether building a sustainable, everlasting corporation is always an appropriate goal.

Innovation can manifest itself in different forms: technological (Google), business model (Uber), distribution (Xiaomi), organizational structure (Hyperloop), and others. Innovation can also come in varying degrees. At one end of the spectrum lie the incremental process improvements, while the other extreme would encompass moonshot projects.

Established organizations can leverage their scale and resource base into incremental optimizations. However, for truly disruptive innovations that threaten to upend an entire industry, it’s usually more effective to start with a clean slate. Startups focus all of their resources on long-term, audacious projects, because they are conceived and capitalized to do just that. They do not possess any legacy baggage or short-term activity to optimize.

Established organizations often lack the optimal structure to respond to drastic change in the market. There’s of course the innovator’s dilemma at play here (how embrace the disruption without sacrificing the core business? etc.). But even beyond the financial and strategic conundrum lies a cultural challenge. The strong corporate culture necessary to succeed in the past can blind an organization when things change. As Kellogg professor Gregory Carpenter explains, “The more successful the organization, the more deeply-held are the values and beliefs that define a culture. Abandoning values is an acknowledgment that your understanding of the world is no longer accurate.”

So for firms facing transformative disruption, the question of whether longevity should still be the ultimate goal strikes me as highly relevant today. Are certain types of radical innovations only conceivable when driven by startups? It may be counter-intuitive (if not heretical) to suggest that the corporation have a finite life-cycle, with a pre-ordained sunset phase (like products do). But it’s a debate worth holding.

The present-day debate in France seems to overlook this fundamental question.

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posted in venture capital by mark bivens

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