Chapter 8: The Aging Organizations: Aristocracy

DIBUJO

Figure 8-1: Aristocracy

As organizations approach the stage I call Aristocracy, interaction among the people who make up the organization grows increasingly important. People want less conflict, less change. The growing stages, by comparison, encouraged and nourished change even though change introduced conflict. The quality of interpersonal relations was of only minor significance.

To reduce conflict, a company in Aristocracy keeps change to a minimum. There are fewer disagreements and an important "old buddy" network emerges. The lack of conflict produces no noticeably dysfunctional results-yet. The organization is reducing its velocity of change, and it will feel the results later. The organization is engaged in a process of steadily increasing the distance between itself and its clients, and the decline of entrepreneurial spirit leads it from Late Prime to the Fall and eventually to Aristocracy. Aristocratic organizations characteristically:

• Have reduced their expectations for growth

• Have little interest in conquering new markets, technologies, and frontiers

• Focus on past achievements rather than future visions

• Are suspicious of change

• Reward those who do what they are told to do

• Are more interested in interpersonal relationships than in taking risks

• Spend money on control systems, benefits, and facilities

• Care more about how things are done than they care about what and why things are done

• Value formality in dress, address, and tradition

• Employ individuals who are concerned about the company's vitality, but the operating motto is "Don't make waves"

• Engender only negligible internal innovation; they buy other companies to acquire new products, markets, even entrepreneurship

• Are cash-rich takeover targets

An Aristocratic organization's steadily declining flexibility, which began in Prime, has a long-range effect. The capability to achieve and produce results is also declining. Because it has neglected to pursue long-term opportunities, the company's ability to respond to short-term needs suffers as well. The company produces results, but it can- not anticipate them. Its goals are, for the most part, short-term and low-risk. The organization has sown the seeds of mediocrity.

With less of a long-term view, a new style of organizational behavior emerges. The climate in an Aristocratic organization is relatively stale. What counts is not what people accomplish or do, but how they do it. As long as they lie low, making no waves, they survive and even earn promotions. Their accomplishments-or lack of accomplishments-are not significant factors.

Members of an Aristocratic organization are distinctive. Their behavior is remarkably different from those of other organizations on the lifecycle. Watch how they dress, where they meet, how they utilize space, how they address each other, how they communicate with each other, and how they handle conflict.

Dress Code

In an Infant company, if you can produce, you can wear your clothes inside out. No one will care as long as you get results. By the time the company has reached the Go-Go stage, its people start wearing suits and sport coats with ties, but there is no hard-and-fast dress code. Prime companies require their people to look professional. The suits they wear-with white or blue shirts-are neither too expensive nor too cheap, and the ties all have a certain look. There is a functional uniformity that communicates a premeditated image. By the time the organization is an Aristocracy, only the uniformity remains. It is not necessarily functional to present a desired image. The dress code is there for the sake of uniformity. Management is dressed as if going to a wedding or a funeral. The conservative uniformity of everyone's dress reflects the conservative uniformity of everyone's thinking. Form dominates function in the organizational climate and express- es itself in the furniture, dress code, memos, and the space people utilize.

Meeting Rooms

Where do members of Infant organizations meet? They don't have time for meetings, so there is no formal meeting place. Meetings occur in taxis on the way to airports, in restaurants during meals, in corridors, and in elevators. Go-Go staff members, if they meet at all, do so in the founder's office: at the center of power. Working break- fasts, lunches, and dinners are part and parcel of the Go-Go way of life. Because, by and large, the founder makes all decisions, discussion is abbreviated. People wander from topic to topic, and it is often difficult to understand how the discussion led to a decision.

Adolescence involves many power shifts, and there are many meetings. Instead of being on the road, people are in meetings, deciding responsibilities, rules, policies, information needs, and reward systems. In abnormal Adolescence, the real meetings take place outside the official meetings-in hallways or at people's homes in the middle of the night. The rumor mill reigns over those unofficial meetings. The formal meetings are dull, filled with tension and restrained anger. Behavior is cliquish. Everyone is watching everyone else. Who is talking with whom? Who is having lunch with whom?

By the time a company reaches Prime, it has a highly official meeting room where the executive committee works. The meeting room is furnished for utility more than comfort: sturdy chairs and tables, good lighting, large easels, and white boards with colored markers.

When an Aristocracy plans and designs its boardroom, the results are strikingly different. In a typical conference room, you would almost certainly find a huge, highly polished, dark wood table surrounded by matching plush chairs. The carpet is thick. The light- ing is dim, and the windows are heavily draped. From the paneled walls, a larger-than-life portrait of the unsmiling founder looms over the room, as if warning everyone to remember his or her place. Of course, not all Aristocracies keep portraits of their founders on their boardroom walls. Many hang pictures of all their past presidents or very classical pieces of art.

The roar of silence is overwhelming. When participants walk into one of those conference rooms, the dim lights, the uniformly dark suits, and the somber portrait make them feel uncomfortably out of place. How can they possibly tell the corporate leadership, "Hey, guys, we're losing market share." I once worked with a very large bank. Its boardroom was on the most prestigious floor. Its doors were not doors but honest-to-goodness gates: They were two stories high and made to look like the tablets of the Ten Commandments Moses received from God on Mount Sinai. There were no doorknobs. An electronic eye signaled the doors to open whenever someone approached. As I walked toward the bank's boardroom, I had the weird sensation that the gates of heaven were opening for me. A long, long mahogany table, big enough to accommodate as many as thirty people, dominated the room. Each participant sat in a deeply cushioned chair, facing a microphone. The room was dark because heavy drapes shut out the rest of the world. I definitely felt intimidated.

Industrial psychologists point out that space, lights, and color have impact on workers' behavior. Executives are not beyond such influences. The formal boardroom decor orders everyone who enters, "Don't make waves!"

Use of Space

An Infant organization has no space. Everyone shares tables, typewriters, and telephones, and every member of the shoestring operation is very cost-conscious. The personnel of a typical Go-Go company are spread all over town or the country. The sales depart- ment is on Main Street, accounting is several miles away in another building, and the headquarters is in another town. Why? The Go-Go is an opportunity-driven company. It does not plan, it reacts. When sales take off, it reacts, renting additional space and hiring new staff. As the Go-Go matures and proceeds to Adolescence, that collection of scattered space acts as a catalyzing influence that fuels the gossip machinery.

The company consolidates its space when it reaches Prime, moving to a location that can accommodate all related operations. The people are proud of the efficient ways they utilize their space. The office space is well-planned, and facilities support the functions for which they were designed. Companies in Prime don't indulge in excessive opulence, luxury, or showmanship.

By the time an organization reaches Aristocracy, however, form has overtaken function. Its empty corridor alone could adequately serve the needs of several Infant companies. The rent for the presi- dent's suite-with its private bathroom, dining room, and secretary's office-is probably higher than the rent the company paid for all its facilities back when it was a Go-Go. It's not unusual for a company in Aristocracy to drop a cool million dollars on its president's office, furniture, and decor. One such presidential suite boasted the most lavish bathroom I have seen in my entire life.

How They Address Each Other

The personnel of Infant and Go-Go organizations customarily address one another by their first names. The names people use for one another in an Adolescent company are not fit for print. When an organization reaches Prime, its people use both first and last names. By the time the organization has reached Aristocracy, people at meetings address each other almost exclusively by last name. They become very formal. It's Mr. Smith and Ms. Jones. They may be Bob and Mary inside their offices, but in those formal meeting rooms, the address is formal. In certain countries, formality is accentuated by elaborate military, educational, and social titles: In German cultures it is: Colonel Shwartzer (retired), or Dr. Alexburg (although his Ph.D. is in medieval literature and is completely irrelevant to his position in the company). In Mexico it is Don Alexandra, or Licensiado or Inginiero Gonzales. In Italy, people who have com- pleted an undergraduate course of study get addressed with the honorific, "doctor," and in Brazil, simply being an executive earns one that title.

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Communication

Discussion during the Courtship stage is characteristically vague. People talk about their thoughts and feelings. They are repetitive; they contradict themselves; they are easily annoyed; and it takes lit- tle to insult their sensitivities. In a sharp departure from the roman- tic meandering people enjoyed during Courtship, Infancy demands that talk be short, straightforward, and occasionally offensive in its brutal honesty. Action speaks for itself, and action speaks louder than words. "Get it done now!!!" is the motto of an Infant organization.

The communications in a Go-Go company are a continuous source of confusion. People make demands whether or not there is somebody who can respond to them. Staff members are expected to do the best they can, but no matter what they do, it's invariably less than what the aggressively arrogant founders expect. Four-letter words are the standard of expression. In Adolescence, paranoia reigns, and everyone is engaged in endless interpretations and rein- terpretations of who said what and why.

What a relief it is to work in a company enjoying its Prime. Communication is clear. Everyone knows what, why, when, how, and who. The work is demanding, but achievable. People consider their words. Speaking in deliberate and measured tones, they seem to be weighing the importance of what they say. By the time the company has slipped into Aristocracy, the mode of delivery is the essence-the medium is the message. People speak slowly, but that has nothing to do with the content. Managers overuse visual aids and written communications. During meetings, people hedge, using endless strings of double negatives and qualifiers. "It seems that, under certain cir- cumstances it may be assumed, however, on the other hand, and not necessarily so, we might conclude that. .. " One leaves such a meeting wondering what really happened. The transcript of meeting pro- ceedings reads like a maze of hints, insinuations, and veiled innuen- do. Only the initiated really know what is going on. Problems in Aristocracy are handled the way the Victorians handled sex: Everyone knows it's going on, but nobody will talk about it.

A joke I used to hear in communist countries applies to aging companies: A person comes to a medical center and asks for an eye-ear doctor. "There is no such thing," the nurse says. "There is either an ear-nose-and-throat doctor or an eye doctor. Why do you need one?'' she asks. And he answers, "I hear one thing and see something totally different."

If, privately, you ask someone to explain what went on in the meeting, he might tell you, "We're losing our market share." Why don't people come right out and say that? They would have in an Infant or a Go-Go company. They won't because the company's problem has not yet reached an acute condition, and everyone knows how dangerous it is to make waves. So people hope that the company will weather the storm. They believe that if the company does survive its current difficulties, it will not be due to any action the company takes. Survival depends, they think, on events beyond their control. "Maybe the government will change the laws." Or, "the competition cannot continue to expand this way. They will certainly experience growth pains." A company in Aristocracy doesn't depend on its own efforts and wits to change situations. Enchanted with its past, it is paralyzed to deal with the future. There is one other reason for the apparent paralysis or the slow-motion approach to problems that require change: The power center is weak.

Weak Decision-Making Bodies

Working with the highest levels of government, I have often been dis- appointed to find Aristocratic behavior where I had expected control. At the lower levels of government, I am not surprised to see bureau- cratic behavior, but I was sure I'd be meeting with the centers of power when I met with prime ministers or presidents. But I, like the employees of an Aristocratic company, was wrong. Employees believe that the president of their company is all-powerful. I expect- ed that from prime ministers. But, like the children's story says, the emperor has no clothes! Leaders of Aristocratic organizations- whether they are governments or corporations-act as if they can do a lot. In reality, however, they can do little quickly. There are so many committees that need to agree and decide. And there are many, many interest centers that need to be coalesced and appeased. It's no won- der that any decision involving change is slow in coming if it comes at all. The leaders of Aristocratic companies do only what politics allow them to do, and as their companies continue to age, that inability to act gets much worse. Those leaders can do nothing that tests the lim- its of their power. And nobody forces action until problems escalate to crisis levels, and all the parties needed for a decision share the heat. We can understand this phenomenon with business organiza- tions once we discuss how organizations deal with conflict and cash.

Conflict and Crisis Handling

The way members of an Aristocracy deal as a group with conflict is another factor that distinguishes this stage. Vittorio de Sica illustrated the situation in his 1971 feature film, The Garden of the Finzi-Continis. His film examines the behavior of an aristocratic Italian- Jewish family just prior to World War II. When the Italian Fascists started to persecute Jews, the Finzi-Continis refused to believe that anything serious could happen to them. "We've been here for a long time," they said. "We are one of the most distinguished families in Italy." So they continued to play tennis behind the high walls of their estate, and they ate in their chandeliered dining rooms, continuing business as usual. While individually, each member of the family was terrified, as a group, life went on as always. Enchanted with their past, they were paralyzed to deal with their future. The group dynamics overpowered individual fears.

The Aristocratic corporation behaves similarly. Hidden in their own beautifully opulent high-rises, squandering space as though it costs nothing, the managers are individually worried about the com- pany and its future. In formal meetings, however, none of them would think of assertively voicing apprehensions. When a consultant faces managers collectively and points to competitive threats, they are prone to reply, "Don't worry, we've been here long enough. They need us. We have a name, tradition, and know-how." But individually, the managers agree with the consultant. The situation is bad, and someone (usually someone else) should do something. In one organization, managers explicitly said, "We don't like to compete. We'd rather serve." They doom themselves to repeat tomorrow what they did yesterday.

A sclerotic person gets treatment for his ills. A sclerot ic organization is impressed with its state of health.

-Vladimir Bulatovic

The Aristocratic company denies the current reality. While it is losing market share and is increasingly incapable of competing with products or marketing skills, its members maintain their business-as-usual attitude. They feel obliged to maintain the company's track record, matching its historical performance. "We must distribute div- idends. We cannot afford to disappoint the widows and orphans who have invested in us." So they distribute X dollars per share every year, and X becomes an increasingly larger share of their profits.

I worked with a company that declared dividends amounting to 93 percent of the year's earnings, even though its product was becoming obsolete and the company had no new products in development. This was organizational suicide. I asked, "How come?" The answer was typically Aristocratic. "We plan top-down, teleologically and structurally. It works like this: Top management decides how much return it should give shareholders. From that, managers deter- mine how much profit the company needs to show, and how much profit each unit has to contribute, its sales goals, and the acceptable level of expenses."

Please note: The process they described had nothing to do with what was happening in the marketplace. Such behavior is self-centered, arrogant, aristocratic, and detached, and it can happen only when companies think they can operate as if they exist in a vacuum. In reality, because the units could not meet the sales targets, the profit goals were also unattainable. Nevertheless, top management felt obliged to meet its annual commitment to distribute dividends at a certain level.

DIBUJO

Aristocracies, by and large, attempt to increase profits by raising revenues rather than by cutting costs. And they raise revenues, not by increasing unit sales, but by raising prices. Raising prices in the face of declining market share is as dangerous as throwing gaso- line onto a fire. It only accelerates the company's slide into the next stage of aging-Salem City. And, as you might guess, in Salem City witch hunts are commonplace.

From time to time, Aristocratic cultures do cut expenses, but they do that only if they have no alternative. What's more, they eliminate only the most trivial expenditures. In a moment of rage, a frustrated executive once told me, "They are trying to clean up a whorehouse by kicking out the piano player!" But that was ten years ago. Nowadays, downsizing is how companies cut expenses. At the time that I was writing the first edition of this book, only companies in their death throes would resort to downsizing. In the last ten years, however, companies have downsized prior to having crises manifested in their financials. Companies appear to be more proactive and less patient than they had been in the past.

Mergers and Acquisitions

Aristocratic organizations are more than cash-rich. They are cash-heavy. If you compute the Dun & Bradstreet ratios of Aristocratic and Prime organizations, the Aristocratic ratios are higher. Aristocracies are conservative and liquid. Their internal units make few demands for investments. The prevailing sense of organization-wide complacency overpowers aggressive aspirations of any individ- uals. People rarely propose a risk-taking endeavor. The Aristocratic organization uses its cash to acquire growth, externally.

When they go shopping for acquisitions that will fuel their growth, what do Aristocracies buy? Not Infants. "They're too young and risky!" Not Adolescents. "They're too problematic!" Not Primes. "They're too expensive!" Normal Aristocracies buy Go-Go companies. Go-Gos and their new technologies in growing markets are very attractive to Aristocracies, and the Go-Gos, tired of trying to get organized and having to grow using their own resources, are receptive to offers. They figure an Aristocracy can make everything easier because it is bigger, richer, and more organized.

What really happens? Every time the new acquisition wants to make a move, it has to submit a budget and a business plan to the board. Because it always takes the board of an Aristocratic company time to do anything right, by the time it approves the action, the Go-Go-accustomed to moving quickly-finds that it's already too late. The opportunity has evaporated. It doesn't take long for key managers of the Go-Go to take off, leaving a shell of a company behind. A Go-Go's biggest asset is its entrepreneurs, and when the Aristocracy appoints one of its own administrators to run the Go- Go, even the remnant of entrepreneurial spirit might be lost.

However, Aristocracies are not always the acquirers. Being cash-heavy, they are themselves attractive takeover targets. And what kind of company will want to acquire an Aristocracy? A Go-Go organization. In their eagerness to grow, and with arrogance as to their capabilities, Go-Gos have limitless appetites.

In either case, it's difficult to make a good marriage. When the Aristocratic organization buys a Go-Go, the latter suffocates. What made the Go-Go exciting and vigorous was its flexibility-its high-speed decision-making. Go-Gos are apt to make most decisions intuitively, and they have little respect or patience for ritual. The Aristocratic climate couldn't be more different. The ritual is rigor- ous: It requires budgets in a certain form, by a certain time, and with certain details. Go-Gos find all that stifling.

When a Go-Go acquires an Aristocratic organization, it is like a small snake that swallowed a very large gopher. Digestion takes a very long time. The Go-Go is overwhelmed by the problems of the Aristocratic organization, and the leadership discovers that milking cash out of the Aristocratic company will not move it back to Prime. What remains is only a bankrupt Aristocracy. The vigorous Go-Go management introduces sudden and forceful waves of change that may paralyze the Aristocrats with fear, making a workable merger even more difficult. Furthermore, while it is trying to digest its latest prey, the Go-Go may sacrifice its own growth momentum and ori- entation for several years. If the Aristocracy is very old, and the Go- Go company cannot easily solve the problems inherent in old age, the Aristocratic organization gradually consumes the Go-Go execu- tive's time, putting both companies in jeopardy.

If a cash-heavy Aristocracy cannot acquire a Go-Go, it may merge with another Aristocracy, compounding its problems?

Recent studies of conglomerates show that by and large, the anticipated synergies do not occur. I don't find that at all surprising. Mergers always introduce culture clashes, and only the best trained and talented manager is prepared for and able to handle them.

The Silence Before the Storm

The product lines of companies in the advanced stages of Aristocracy are out of date. The clients know it; the sales people know it; and even the chief executive knows it. Still, nobody does much about it. People file their complaints. Management holds endlessly nonproductive meetings. In short, everyone is waiting for someone else to do something. In an effort to save their necks, many people leave the organization. Those who, lacking attractive opportunities, cannot leave, accuse the deserters of disloyalty.

A sense of doom pervades the organization. The company tries to lift morale by awarding gold medals for obscure achievements or by holding seminars in resort hotels where most of the time is spent vacationing, not working. Many Aristocracies react to the overpowering sense of impending calamity by building expensively elaborate and unnecessary new buildings. Managers spend on form as if it affects the content. We see similar behavior in some failing marriages. Some couples try to repair their relationship by making new commitments, such as having a child or building a new house. They confuse cause and effect, input with output. A baby or a new house should be expressions of commitment. A couple cannot expect that building a new house or having a child will create commitment. Such acts should satisfy functional needs rather than follow form. Form cannot cause function. It must follow function.

What causes the Finzi-Contini syndrome? Why do people hint about the problems, expecting and waiting for someone else to do something about them? Everyone knows what is happening. Privately, people analyze their problems with remarkable acuity. So why doesn't management provide leadership and act? My theory explains that behavior focuses on what I call "the present value of a conflict." We know that the value of a dollar received a year or ten years from now is not equal to a dollar received today. We calculate the present value of a stream of income over time. The same might hold true for the cost of a declining market share or a future problem. A problem in the future is not so costly as the same problem facing us today. The anticipated, dreaded future might never occur.

This old story illustrates my point. Many years ago, a Sultan's officers threw two thieves into jail, and their executions were immediately scheduled. One of the thieves sent the Sultan a message, say- ing that if he were given three years, he could teach the Sultan's favorite horse to speak. "How can you promise that?" the other thief asked him. "You can't teach a horse to speak!"

"You never know," the first responded. "In three years, the Sultan might die, the horse might die, or maybe the horse will speak!" Like the scheming thief, Aristocratic organizations are playing for time. Yes, they are losing market share, but right now, with their resources, that's a minor factor. In the future, they say, who knows? The government might change, government policies might change, the competition could go broke, or customers might change their taste in goods. Maybe they will survive or even flourish. Note: They do not rely on their own efforts to survive. They count on the envi- ronment's turning in their favor. Some time ago, a senior banker told me a joke about a country I'll call Calico. It easily applies to every country, corporation, or individual human being.

Waiting for ... (?)

"As we all know," the banker said, "Calico has deep economic problems. There are two possible solutions to these problems. One is rational. The other is a miracle. The rational solution is that Saint So- and-So will come down from heaven and save Calico." I interrupted him. "If that's the rational solution, what could the miracle possibly be?" He continued, "It will be a miracle if the Calician people get off their butts and start working really hard."

By the standards of that joke, Aristocracies have rational solutions to all their serious problems.

Compare it with another joke that applies to Go-Go companies: A guy comes to his friend's store and says, "I was so sorry to hear that you had a fire in your store." And the store owner leans toward him and whispers, "Shhh ... It's tomorrow."

Go-Gos take charge of their lives. Aristocracies want the environment to become favorable.

Why, rather than taking action, do Aristocracies rely on external factors? The problems of the future are not yet pressing. The company is liquid and profitable. Taking action now means making waves and becoming embroiled in a political fight. And the individual who has the temerity to make waves has to pay the price of causing an uproar today-not three years in the future. The political costs of making waves today is higher than the present value of solving future problems.

With the concomitant decreasing sense of control, people allude to problems, hoping that someone else will do something. That's what consultants are for. The organization hires them to say what it doesn't dare admit itself. Management lets someone else "take the chestnuts out of the fire." And how do the executives react to the consultants' reports? They read them, but they take no action until Salem City-the next stage of aging-sets in. During that stage, the erstwhile future problems become current problems, and immediate action is no longer optional. By that time, however, the Sultan's horse still refuses to talk. It is kicking, and kicking hard. Market share is shrinking; cash flow is negative; and good people are streaming away. All the vital signs of an organization are screaming, "Emergency!"

Desperate over continually declining market share, revenues, and profits, the Aristocratic organization enters Salem City. This is not a gradual transition. It is quick and forceful. The Aristocracy has been covering its losses through acquisitions and by raising prices. As the prices go up, the number of units sold goes down. When man- agement first raises prices, revenues climb, but eventually, the demand curve becomes inelastic. Now, the increase in price reduces quantity sold to the point that total revenue is now lower than before the price was raised. The organization has expended all the goodwill it had so painstakingly started building from its Infancy. The price increases-artificial facelifts-stop working because they are not the real way to increase revenues. The real thing is satisfaction of client needs-providing real value.

The day of reckoning arrives: The company cannot raise prices another penny, and acquisitions are no longer possible. The truth sur- faces rapidly. Then the niceties are gone. Knives are drawn, and the fight for individual-not organizational-survival begins. Caution! You are entering Salem City.