Do you want to understand innovation, compensation, marketing, strategy or a host of other management issues? Look to the age of your organization.
University of Toronto Professor David Foote sensitized us in the 1990s to how demography can explain – and predict – a great deal about societal change and marketing. Tamas Koplyay, a University of Quebec at Outaouais professor and research director for the Canadian Advanced Technology Alliance, feels the same way about organizational life cycles' predictive powers.
"The life cycle explains and predicts – not just the future but the past. It helps companies understand why they did what they did and where they are headed," he said in an interview. So wherever you are in the corporate hierarchy, it's important to understand this evolution as it likely determines your focus and flexibility.
Organizations start with an idea – an idea that becomes a product. So in many ways the organizational life cycle is a chronicle of innovation, as shown in Prof. Koplyay's research paper with two colleagues on ResearchGate. But it goes beyond product. He notes there are three other types of innovation: Marketing, production-process and financial. They occur – indeed, become necessities – at the four different stages – startup, growth, maturity and decline – of the organizational life cycle.
At the start, product innovation is indeed at centre stage. As the company starts its rapid growth – stage two, the product now being of interest beyond early adopters – marketing innovation is key, to help determine the groups to appeal to and channels to exploit. "Marketing starts to dictate the product changes it needs," he emphasized in the interview.
When the next stage – maturity – comes, cost advantage becomes vital and process innovation should top the agenda through such approaches as buying competitors to take advantage of economies of scale. And then, as the company reaches full maturity, with no other opportunities for the product and associated offerings, the fourth stage – decline – sets in and the company needs financial innovation, figuring out how to put its funds to best use, which usually means beyond the current company.
Behind this evolution is, of course, revenue, expenses and profits. In the early stages of the organization's life, the entrepreneurs are trying to build the top line – revenues – faster than the competition. "Nobody cares about margins," Prof. Koplyay notes. That is done, he says, because revenue growth best correlates with stock price and investor interest. Build the product, sell it, find new groups to interest and refine the product as needed for what will be rapid expansion.
Once the exponential growth phase is exhausted, investors want operational discipline to maintain the share price. So the focus shifts to margins, which in turn require cost controls. It's around now that professional managers become important. Competitors are also trying to improve their margins and a shakeout looms as each figures the best way to cut margins is to buy the other. Technology is no longer the key; financial strength will determine who wins. But of course, he notes, only 30 per cent of mergers and acquisitions – a hallmark of this phase – succeed. However, adding to their lustre is the fact, he says, that "executive compensation is totally correlated to corporate size – not profitability or whiz-bang innovation."
At some point, the firm stops investing as much in the company's expansion, since growth prospects dim and returns profits to investors in terms of dividends. This is an important admission: Decline is on its way. But Prof. Koplyay stresses good money can still be made. Some competitors will fold and you can move into their terrain. "The risk is that suddenly the market will disappear and you can be left with sunk costs. It could happen years down the road or tomorrow," he notes.
The company is treated as a cash cow. The money is directed to other investments that can return the best returns – it's time for financial innovation, not product, marketing or process innovation. He cites Microsoft as an example of a company that failed at this stage, unable to make much money beyond their original core products. On the other hand, "Cisco did this extremely well. In a candid moment they admitted they were an acquisition company not a technology company."
At each stage, the four types of innovation not only change place at centre stage but each has its own different role. For example, marketing innovation moves from product awareness in the early stage; to brand development and price reductions to spike sales; to promoting customer loyalty and other methods to defend your market share; then in decline to either market rejuvenation or market exit. Financial innovation evolves from lines of credit, angel investors and other financing to get off the ground; capital acquisition and handling cash flow as growth occurs; capital asset management in maturity; cost controls, reinvesting profits and portfolio management in decline.
Each firm handles those stages differently. But each firm hits them, including yours.
Harvey Schachter is a Kingston, Ont.-based writer specializing in management issues. He writes Monday Morning Manager and management book reviews for the print edition of Report on Business and an online column, Power Points. E-mail Harvey Schachter.