Chapter 6: PRIME

Figure 6-1: The Prime Organization

What is Prime? It is the optimal condition of the lifecycle, the achievement of a balance between self-control and flexibility.

In this book-unlike the first edition, in which I located Prime as a spot on the lifecycle curve-Prime covers a segment of that 8586 What Is Going On? curve. Why? Flexibility and self-control are incompatible and they engage in a constant "struggle." There can be no stable equilibrium. 1 Sometimes the organization is more flexible than controllable, and sometimes it's not flexible enough. Don't hold your breath. Like happiness and other good things in life, Prime cannot be constant; if you do not keep up with it, you lose it.

Whether a company stays in Prime or slides away depends on what management does to maintain its Prime condition. A company cannot simply reach Prime, sit back, and rest. Does management promote activities that retard aging and sustain the vitality of Prime? When management becomes too flexible, making decisions on the fly, what corrective actions does it make?

Even if you are on the right road, you will eventually get run over if you just sit there.

— ANONYMOUS

There are two parts to Prime: a still growing Prime, which I call Early Prime, and Late Prime, which I sometimes identify as the Twilight Zone. In reality the signs that indicate whether the organi- zation is in Early or Late Prime might appear in both situations. Since no organization is in one spot on the lifecycle anyway, this confusion might not be critical. That is especially true for Prime because flexibility and self-control are in a continuous struggle, periodically exchanging dominance. This ambiguity imposes difficulties only in terms of how I present the material. Although in reality, the signs of Early and Late Prime are not mutually exclusive or discrete, I first present Early Prime, and my description of Late Prime follows at the end of the chapter.

Early Prime

These are the characteristics of organizations in Early Prime:

• Vision and values-"they walk their talk"

• Institutionalized governance process

• Controlled and nurtured creativity

• Coalesced goals

• Conscious focus and priorities

• Functional systems and organizational structure

• Predictable excellence

• Growth in both sales and profit margins

• Organizational fertility

• Intra- and inter-organizational integration and cohesion

Vision and Values

Open your arms to change, but do not let go of your values.

-ANONYMOUS

A Prime organization is not subject to the shifting wishes of a single person. It is guided and led by a message-a vision of its reason for being. The people in the organization believe that what they are doing is important. They know who the stakeholders are and they recognize their needs. The vision might be to become the worldwide leader for a certain product line, serving a certain industry, while maintaining such values as social responsibility. One company we work with has hundreds of stores that focus on the low-income pop- ulation. Its management put a lawyer in each store to offer free legal advice to those who couldn't afford to pay for legal protection. The goal was not to attract more sales. It was a true expression of the organization's intention to benefit the communities it serves. Sustainable growth is another value that guides behavior.

Organizational Prime has a military analogy. In times of war, soldiers know that their mission is to defend their homeland. They should know also how they are expected to handle captured enemy soldiers, and they have values that don't allow them to leave their own wounded or dead on the battlefield. They know the what and the why as well as the how.

Likewise, organizations in Prime are analogous to self-actualized people: They know who they are, who they are not, and what they want to do in the future.

They have a sense of purpose and a sense of what they will and will not do. They have boundaries that save energy because they won't even consider alternatives that violate those boundaries. They are focused, energized and predictable.

Companies that want to be recognized for the quality of their products have a senior executive in charge of quality assurance. But concern for quality is not reserved for their products alone. They work to preserve the values of their organizational cultures. While that is not less important than product quality, it is more difficult to protect and nourish. When an organization reaches Prime, it usually assigns someone to be responsible for monitoring and auditing its vision and values: Do we truly walk our talk? The person charged with that responsibility also works to develop community projects and involve his or her colleagues in those initiatives. Such activities reach far beyond giving money to the arts or to charity. They require giving time and human caring. Organizational values include integri- ty, honesty, and responsibility to our world.

DIBUJO

As it advances through its lifecycle, a Prime organization continuously develops and nourishes its vision and values.

The vision and values of such companies galvanize their employees. There is a sense of mission in life that goes beyond just earning a living.

At this point, I want to interject a caveat:

Simply having vision and values does not make for a Prime organization.

In my keynote speech to the Social Ventures Network in 1996, I warned those socially conscious organizations against getting car- ried away with values and culture, ignoring such realities as business practices. Those companies have more difficulty reaching Prime than the non-socially conscious: Their ideology sets the bar higher, build- ing sometimes unachievable expectations among their employees. If the only "priests" of those values are the founders, their organiza- tions are more easily caught in the founder's trap. Not only does the organization depend on these leaders for all entrepreneurial energy, it also needs them to keep the organization focused and energized with the values as well.

Thus, organizations need vision and values, which, while neces- sary, are not sufficient. They also need structure and processes that free the leaders of personalized decision-making.

Institutionalized Governance Process

To be in Prime, organizations must be free of decision-making that is dominated by an individual or a small group of powerful executives. They need institutionalized processes of governance: People must know and understand where and how decisions are made. Every Prime organization needs a "constitution" that defines the forums of governance.

Well-established organizations thrive with unwritten but practiced constitutions.

They are comparable to the British system of government. There is no written constitution, but everyone honors the rules. Royal Dutch Shell ran that way for years. People knew who made decisions and how they were made; people knew which papers to submit to whom, by when, and how. And they could predict pretty accurately how long it would take before they would get the results of their queries. There was tradition and a well-rehearsed process. Because that process couldn't keep pace in our fast- changing global economy, the company had to change. Making such a move, which requires writing a new "constitution" and enforcing it, is as difficult as moving from one political system to another.

Organizations that lack a tradition have to write their constitutions. I have helped several organizations do that. A constitution must begin by explaining why the document exists. Then, it should define the decision-making forums, including a description of the membership of each one, its authority, and the requirements of each (unanimity, majority, chairman's approval, and so forth). Some constitutions even account for the possibility of appeal. And, so that it can adapt to changing conditions, every constitution should specify the precise procedure for amending it.

A constitution puts order to the ambiguities of the decision-making process. And, because a constitution usually affords veto power to the chief executive officer, it also assures leaders that decisions will not be beyond their control. Until the need to veto arises, leaders can monitor the open decision-making process. I should point out that in all the companies in which I have established constitutions, no chief executive has invoked the veto to override the decision-making body. Never. Because constitutions open the decision-making process, chief executives have ample opportunity to participate long before there is reason for a veto.

Constitutions also describe the appropriate way to run meetings, defining agendas and specifying requirements for distributing materials ahead of time. I believe that constitutions should state that nobody may make presentations in a decision-making forum. Everyone should have reviewed presentation materials before the decision-making meeting. This stricture helps avoid the wasteful practice of endlessly tedious overhead slides that bore everyone beyond numbness.

Controlled and Nurtured Creativity

Uncontrolled creativity squanders resources. Engineering dominates the organization, driving it to develop products the market does not necessarily cherish. In high-tech companies, the engineers may be so enamored of their ideas, that they generate more products than their companies can afford to sell. At the same time, if sales dominate a company, it becomes a "me-too" company. That's unacceptable for businesses in industries whose markets demand newness.

What now, then?

I look at organizations as power structures. If I want my power- boat to go in a certain direction, I have to engage its engines in a certain manner. If I want to go right, I have to decrease the power of the right engine while increasing the power of the left engine. The same holds for an organization. Describe to me the power structure of any organization, and I will tell you how it really makes decisions and how it behaves. To get the boat to turn to the left, the skipper must do more than simply scream, "Left! Left! Left!" and threaten pesti- lence to those who do not heed his orders. Nor can the skipper elicit action simply by preaching the value of going left. In order to go left, the skipper has to change the power structure.

In a high-tech company where the engineers call the shots, it's possible to achieve controlled, profitable innovation. But for that to happen, manufacturing and the financial controller should have commensurate power. The chief executive needs to align the structure of the process. In this case, the chief executive needs to align the new-product development process. The organization needs to define who has authority for every step: from inception of an idea through its release to ful—scale production. I see the process, which includes even the possibility of aborting it, as an accumulation of appropriate "visas." As a product-development project progresses from one stage to the next, it passes through "gates" at which go/no-go decisions are made. The approval process is similar to the Japanese systern of ringi: Implementation requires the signature of each affecting or affected constituency. Following that system, by the time a new product is ready to be shipped, everything has been done right and in sync with engineering.

To balance opposing forces-creativity and control, innovation and commercialization, market and technology as driving forces we need the appropriate power structure that delineates respective authorities and the processes that integrate their engagements.

Coalesced Goals

I know an executive who keeps a plaque with this motto on his desk: All our revenues come from our customers. Prime organizations know why they exist. They focus on their customers and seek their satisfaction by doing what needs to be done. In aging organizations, the focus is on return on investment; in Adolescence, it is on how to win the internal political fight. The Adolescent's customers are on its radar screen, but they are waiting in the background for somebody to address their concerns-eventually. For companies in Prime, just as for Infants and Go-Gos, the customers are smack in the middle of the radar screen, but there is one major difference. The customer is not the exclusive focus of the company in Prime.

Infants focus on customers because they want approval of their efforts. They listen to their customers, catering to them to the point of self-destruction when powerful and experienced customers take advantage of their weakness. Go-Go companies are intensely focused on their customers. They are always looking for at least one more deal. They seek customers at almost any price. In that stage of colonialization, more means better, and for more, Go-Gos are will- ing to initiate wars.

In aging companies, customer focus is displayed on elaborate posters at the entrance to the corporate offices, and the posters boast the signatures of all the executives. And for many aging companies, that's where the customer focus ends.

In Prime, customer focus is real, but it's not exclusive. Prime companies can tell their clients what they should want. They don't subject themselves to whatever clients request. Moreover, they decide what the customer has no right to want. They say "no" if a Prime customer's request violates such organizational goals as its values, growth strategy, or profit goals, or if it puts too much pressure on its human resources or inventories. A Prime company is knowledgeable about what it wants and what it doesn't want. It is disciplined enough to protect its complex multi-faceted basket of goals. It is responsive not only to financial issues, but to relationships as well. Employees and customers alike are treated with care.

Focus and Priorities

In Courtship, the focus is on why to do; in Infancy, on what to do. In Go-Go, the focus is on what else to do, and, through painful experi- ence, the organization in Adolescence learns what not to do. Companies in Prime know what to do and what not to do. Prime organizations know why (and why not), what (and what not), when (and when not), how (and how not) to do. They enjoy a certain composure and peace of mind when they make decisions. They are not like Infants. They never engage in shoot-first-ask-questions-later behavior. They don't engage in the Go-Go's helter-skelter minute-by-minute changes of direction. They don't suffer from the paralysis caused by the internal struggles of Adolescence. And the endless bureaucratic impotence of aging corporations doesn't plague them. They seem to have all the time in the world whenever they make decisions. They practice their trade Beheshket u bebitha, which in literal translation means: peacefully and confidently, as the Bible advises its believers.

Companies in Prime, like those in Go-Go, make money and grow. But they are not the same:

Go-Gos can tell you how and why they made money. Primes can tell you how and why they are going to make money.

And they do.

The variance for better and for worse, between budget and actual performance, is always significant in Go-Gos-that is, if they have any budgets.

Companies in Prime have aggressive budgets, but the variance of actual over budget is within a predictable and tolerable range. A Prime organization has the vision and aggressiveness of a Go-Go, with the controllability, supported by the predictability of imple- mentation, acquired during Adolescence.

Functional Systems and Organizational Structure

My emphasis here is on the word "functional." Systems that serve their purposes are functional and, therefore, effective. Not all systems in all organizations are always functional.

Adolescent companies run amok with too many systems and way too much paperwork. Some of these processes survive over time, beyond their functionality. Tactical decisions, with the passage of time, become policies by default: No one has challenged their validity. As conditions change, those processes prove superfluous. They don't serve the purposes they ought to serve or were designed to serve. Or they become dysfunctional, interfering with the desired process of decision making. In Prime, companies trim their processes, integrating them into functional systems. The organizational structure is correctly aligned: Mission is aligned with its authority and power structure as well as the information flow and reward systems.

Let's talk about reward systems. B.F. Skinner discovered and scientifically articulated what every mother has always known: If you want certain behavior, you must reward it. You cannot expect behavior A while rewarding behavior B. Basic! Right? But how many organizations actually have systems that reward the values they believe in and the vision they want to follow? Reward systems are often inflexible, and although organizations change their goals, values, and desired behavior, their reward systems can't keep pace with change. They end up with unaligned systems-mission, authority structure, information, and rewards-functioning at cross-purposes. A company in Prime is continuously realigning those subsystems.

Predictable Excellence

Companies in Prime have leadership, structure, and alignment of rewards reinforcing desired behavior. They are guided by visions that are not the ego trip of any one individual. Their plans and control systems monitor their performance and initiate timely corrections. They endeavor to satisfy their clients' needs.

With vision, values, structure, process, systems, and leadership that develop and maintain their location in Prime, why shouldn't these organizations enjoy predictably excellent results? Only events beyond their control can knock them off track. Even then, however, companies in Prime are better prepared to survive than competition that lacks managerial strength. When market forces take their toll, the less qualified competition will crumble, leaving the field open for organizations in Prime to grow stronger yet.

My friend and colleague, Peter Schutz, the former managing director of Porsche, the car company, tells a story about car racing. Most car companies that have won car races pray that the race com- mission will not change the rules. Because, to win under new conditions, requires additional work. After Porsche won a most prestigious race, Schutz, for his part, did hope for new race rules. "If the rules do not change, the mediocre companies eventually catch up," he explained.

If you are in Prime condition, change works to your advantage, and you outpace the weak competition.

Change is a challenge, and it is a challenge for everyone. For the weak, however, the challenge may be insurmountable.

Growth in Both Sales and Profits

The dream of Go-Go leaders is for growth in both sales and profits, but as they aim for more sales their profit margins plummet. In their frustration they become emphatic about sales growth, demanding increases in profits, too. At the Go-Go stage of the lifecycle, those goals are impossible to attain simultaneously. In order to be prof- itable, organizations have to be efficient, not just effective. "Efficiency" is not, however, in the vocabulary of entrepreneurs. They pay more attention to the revenue side than the cost side of the profit formula. It takes Adolescence to acquire an efficiency orientation and cost controls. Finally, in Prime, organizations can be both effective and efficient. They can increase both revenues and profit margins to their optimum level.

Organizational Fertility

To be in Prime means being organizationally fertile. Does that mean that they are introducing new products and entering new markets? That's what Go-Gos do. Companies in Prime do more than that. They create new companies-new business units that have their own products, their own production capabilities, and their own sales capability. The new units are whole entities able to stand on their own. Like a mature tree, fruits of a company in Prime contain the seeds of new saplings. These are not just new functions. These are new profit centers. If they do not have their own sales organization, for instance, they have the budget to pay for the services of a sales organization. They are responsible for profitability and have the managerial capa- bility to achieve those profits. A Prime organization is a group of profit centers that share certain functions because of economies of scale or because of efficiencies of coordination or for maintaining a critical mass for creation. The Prime organization is an extended family of businesses, well-coordinated and disciplined with a common focus and system of values.

Intra- and Inter-organizational Integration and Cohesion

Prime companies are characterized by cultures of mutual trust and respect. There are conflicts, but they never deteriorate into personality clashes. 3 Conflicts are disagreements at worst and misunderstandings at best. People disagree without being disagreeable. Before making final decisions, there are discussions with those who will affect or be affected. Points of view are considered and taken into account, and there are no hard feelings if the recommendations are not heeded. All people really expect is that their opinions should be heard and be given respectful consideration. That's all.

That internal cohesion frees the organization to dedicate its energy to external cohesion. Prime organizations are well-integrated with their clients, suppliers, investors, and the community in general. They are admired for their services and practices. The high degree of customer loyalty is reflected in repeated sales. Employees enjoy working at these companies. Few leave willingly, and there are steady streams of people applying for positions.

Problems of Prime

Everyone should have problems if they are alive, right? But with so many virtues, what could be the typical problem of a Prime organization?

Most companies in Prime don't talk about being short of cash. That doesn't mean they have plenty of it. Cash crunches in Prime companies are expected and controlled events. They are sensations, not problems. The same applies to the workload in Prime companies. A Prime has no less to do than a Go-Go, but the work burden is anticipated, planned for, and controllable.

The complaint I most frequently hear in Prime companies concerns inadequate management training. In Prime, human factors come into play. I certainly don't mean to suggest that Infants, Go- Gos, and Adolescents have outstanding managerial capabilities. On the contrary, they have those problems in spades. But those youthful organizations are so preoccupied with other more pressing problems that management training doesn't surface to their organizational consciousness. It takes a back seat, and in many organizations it has no seat whatsoever.

What is going on? The Infant organization is product-focused; the Go-Go is sales-focused; Adolescent organizations focus on systems and administration. As they take care of those pressing needs, What Is Going On? one by one, at each new stage, organizations grow and learn until, eventually, concerns about managerial depth surface in Prime.

The main challenge and the greatest problem of Prime is staying in Prime.

In the analytical part of this book, I will address the question of what causes an organization to move out of Prime. What must be done to keep an organization in Prime or to rejuvenate it is discussed in the prescriptive part of the book.

How do we know that the Prime organization is losing its Prime condition? Vladimir Horowitz, one of the world's best-known pianists, once said: "If I do not practice a day, I notice the difference in my playing. If I do not practice a week, my wife notices the difference, and if I do not practice a month, the audience notices the difference."

There is a twilight zone where companies are still in Prime, but they seem to be slipping out of it. It is still light, but the sun has set. If you trace the bell-shaped curve of the lifecycle, you will not find Prime at the zenith. As they say in the fruit business, "If it's green it's growing; if it's ripe it's rotting." If a Prime organization is at the top of the mountain, there is only one way togo-down. Prime does not mean that you have arrived, but that you are still growing, or to use the Vladimir Horowitz analogy, you are still practicing. It is a process, not a destination.

Why is the curve still rising? The curve depicts the vitality of the organization-its ability to achieve effective and efficient results in the short and the long run. In this case, short-run effectiveness, as measured by sales, is still rising and so is short-run efficiency, as mea- sured by profitability. But long-run effectiveness and efficiency are declining. So while the curve is still rising, its propensity to go up is declining.

The increases in short-run effectiveness comes from the organi- zational momentum generated in Courtship, tested in Infancy, refu- eled in Go-Go, institutionalized and channeled in Adolescence, and fully-capitalized on in Early Prime. If Prime organizations don't refuel that momentum, if they lose entrepreneurship, if they keep capitalizing on the momentum rather than nourishing it, their rate of growth will decline, and, eventually, organizational vitality will level off. That will be the end of growth and the beginning of decline.

Figure 6-2: DIAGRAMA

The next chapter is dedicated to that subject. Here we should note that the earliest signs appear in Prime, when people least expect them. The first mild signs of decline appear in Late Prime, express- ing themselves more fully during the Fall, and emerging quite emphatically during the aging stages of the lifecycle.

For humans, aging does not start with white hair. Even the middle-age spread of one's midsection is not the real start of aging. Aging starts in the mind, when one gets lazier and lazier about initi- ating and, then eventually, even responding to change. As one's state of mind changes, that change eventually expresses itself in the body and its functioning.

When organizations are getting out of Prime, they still perform as if they were still in Prime, but the drive to improve and therefore change is no longer there.

It is time for us to realize that we are too great a nation to limit ourselves to small dreams.

We are not, as some would have us believe, doomed to an inevitable decline.

I do not believe in a fate that will fall on us no matter what we do.

I do believe in a fate that will fall on us if we do nothing.

-RONALD REAGAN, INAUGURAL ADDRESS, JANUARY, 1981

Late Prime/Fall

It is very difficult to distinguish whether a company is still in Late Prime or whether it is already in the Fall. The behavior is the same. The difference is the frequency with which Prime characteristics manifest themselves and how long those behaviors persist. For that reason, I present Late Prime and the Fall as a single stage in the lifecycle.

A company in Late Prime/Fall is a company that has been feeling content-complacent, perhaps-for some time. It's still strong, but it's starting to loose flexibility. It has used nearly all the develop- mental inertia it had amassed during its growing stages, and it's starting to lose its driving, generating force-the desire to change, to create something new. The organization suffers from an attitude that says, "If it ain't broke, don't fix it." The company is losing the spirit of creativity, innovation, and enthusiasm for change that brought it to Prime.

As flexibility declines, the organization mellows. Although it is still results-oriented and well-organized, there is less contention than in previous stages. More and more, people are adhering to precedence and relying on what has worked in the past. The company's stable position in the marketplace has given it a sense of security that may, in the long run, be unjustified. From time to time, creativity and a sense of urgency emerge, but such eruptions are increasingly short-Prime 111 lived. Orderliness prevails and, in order to avoid endangering past achievements, people opt for conservative approaches.

In contrast to earlier stages, people spend increasingly more time in the office, talking among themselves, reducing the time they spend with clients or on the line. In military organizations, you can see that phenomenon expressed in the ratio of fighting units to sup- port units. In social service organizations, it is expressed in the number of social workers who are real case workers, treating families and children in the field-as opposed to the number of administrative social workers who are equally, or maybe even better-trained-in the office. On profit-and-loss statements of operations, it is expressed in the rise of the general and administrative expense as a percentage of revenues as opposed to the cost of operations as a per- centage of revenues. On macro systems, it can be measured by the growing government expenditure as a percentage of the GNP.

Whereas during the growing stages, disagreements were expan- sive and vocal, now, people express their opinions with sheepish grins, as if to say, "It's not really that important." The sense of urgency is not there. People don't mind prolonged meetings. When they are asked to attend meetings, they no longer object or rage. Nobody screams, "Where the heck do I find time for another meeting?" The atmosphere is decidedly more formal. Later on, when the organization ages, people come to meetings because they want to protect their own turf rather than protect the company's interests. Meetings are where the politicking takes place.

In Late Prime/Fall ideas get a hearing, but there is little excite- ment for investigating new territory. Like a company in Early Prime, people still discuss long-term strategy, but short-term considerations increasingly creep into the decision-making process. Moreover, the centers of power are shifting. The financial and the legal executives are gaining power, and measurements are taking the place of anything the new power base considers "conceptually soft thinking." Intuition and judgment play decreasing roles as facts, figures, and formulae rule the day.

The Late Prime/Fall organization hesitates to take risks. Sales continue to rise, but the revenues that are generated by new prod- ucts that did not exist, say, three years ago, are declining. More often than not, new products are not really breakthroughs. They are mere- ly product enrichments. The entrepreneurial spirit is dwindling. (The112 What Is Going On? detailed manifestations of this behavior and the reasons for it will be discussed in the next chapters.)

If entrepreneurship remains dormant, eventually the company's ability to meet customers' changing needs will suffer.

The slide into Aristocracy, the next phase of the lifecycle, is subtle. The organization experiences no major transitional events as it did moving from one stage of growth to the next. From Prime on, movement along the lifecycle is a process of deterioration. When organizations grow, they reach transition points, bud, and flower. When, however, organizations age, there are no distinct points in the continuous process of incremental rotting. It is a process of decay.

Problems of Early Prime

Normal	Abnormal
Insufficient managerial depth	Insufficient decentralization

Problems of Late Prime/Fall

Normal	Abnormal
NONE! There are no normal problems of aging	Signs of disintegration
	Signs of decreased entrepreneurial activity
	Satisfaction with the results and the process
	Reliance on what has worked in the past
	Sense of security, no sense of urgency
	Order for the sake of order
	Increasing time spent in the office, behind the deskIncreasing time spent in the office, behind the desk
	Increase in overhead as percentage of revenues
	Power shifts to staff positions away from line
	Increased reliance on hard, measurable data; decreased attention to judgment
	Hesitation to take risks
	Loss of vision

The challenge of a Prime organization is to stay in Prime. If it does not do what it needs to do to stay in Prime, that failure will eventually become an abnormal and eventually a pathological problem.