THE LIVING THE LIVING COMPANYCOMPANY

by Arie de Geus

Who is Arie de Geus?• Arie de Geus make unique contributions to manage-ment thinking because the

source of their thinking is experience rather than concepts • Arie de Geus worked for Royal Dutch/Shell for 38 years, from 1951 to 1989• Chairman of Netherlands – British Chamber of Commerce from 1981 - 1988• The Queen of Netherlands appointed him an Officer as the order of Orange

Nessau in 1988• Head of an Advisory Group To The World Bank from 1990 – 1993• Advised many government and private institution , lecture throughout the

world.• The author include on influential in the Harvard Business Review article

"Planning as Learning"• He is a visiting fellow at London Business School• Board member of the Nijenrode Learning Centre in the Netherlands.

ECONOMIC COMPANIES VS. LIVING COMPANIESECONOMIC COMPANIES VS. LIVING COMPANIES

Discipline and CohesionDiscipline and Cohesion:: are maintained are maintained hierarchical control, often highly hierarchical control, often highly centralized.centralized.

Discipline and CohesionDiscipline and Cohesion:: are based on are based on through the trust that results from the through the trust that results from the understanding that both the company understanding that both the company and its members will adhere to their and its members will adhere to their obligation of mutual development of the obligation of mutual development of the potential.potential.

Entry-level RecruitmentEntry-level Recruitment:: handled by the handled by the numbers, and seen as filling the numbers, and seen as filling the necessary positions to best serve the necessary positions to best serve the asset base of the company.asset base of the company.

Entry-level RecruitmentEntry-level Recruitment:: seen as a rite of seen as a rite of passage, representing the first moment passage, representing the first moment for testing the fit between the new for testing the fit between the new member and the community.member and the community.

Executive RecruitmentExecutive Recruitment:: often brought in often brought in from the outside.from the outside.

Executive-LevelExecutive-Level:: usually promoted from usually promoted from within the organization.within the organization.

GovernanceGovernance:: Sacrifices its people when Sacrifices its people when necessary to maximize profit and necessary to maximize profit and shareholder value.shareholder value.

Governance:Governance: Sacrifices assets over people Sacrifices assets over people when necessary to ensure the when necessary to ensure the company’s long-term survival, even at company’s long-term survival, even at the expense of the shareholder.the expense of the shareholder.

Learning AbilitiesLearning Abilities:: centralized control centralized control reduces the space in the organization, reduces the space in the organization, and thereby, it’s learning abilities.and thereby, it’s learning abilities.

Learning AbilitiesLearning Abilities:: trust allows space and trust allows space and tolerance both inside the hierarchy and tolerance both inside the hierarchy and towards the outside world, resulting in towards the outside world, resulting in higher levels of institutional learning.higher levels of institutional learning.

ECONOMIC COMPANIES VS. LIVING COMPANIESECONOMIC COMPANIES VS. LIVING COMPANIES

Arie de Geus identifies two different types of commercial companies in existence today, Arie de Geus identifies two different types of commercial companies in existence today, distinguished, among other factors, by their primary reason for being in business. distinguished, among other factors, by their primary reason for being in business. To explain the difference, de Geus borrows from evolutionary theory To explain the difference, de Geus borrows from evolutionary theory

ECONOMIC COMPANYECONOMIC COMPANY LIVING COMPANYLIVING COMPANY

DefinitionDefinition:: corporate "machine" corporate "machine" DefinitionDefinition:: Living work community Living work community

PurposePurpose:: the production of wealth for a small the production of wealth for a small inner group of managers and investors-inner group of managers and investors-producing maximum results with minimum producing maximum results with minimum resources.resources.

PurposePurpose:: longevity; the development of its own longevity; the development of its own potential.potential.

Management priorityManagement priority:: optimization of capital optimization of capital assets to maximize profits, using people as a assets to maximize profits, using people as a means to that end.means to that end.

Management priorityManagement priority:: optimization of people to optimization of people to increase the company’s potential, with profit increase the company’s potential, with profit as a means to that end.as a means to that end.

EmployeesEmployees:: "outsiders," recruited for their skills, "outsiders," recruited for their skills, who work with their eventual exit in mind. who work with their eventual exit in mind. They trade their time and expertise for They trade their time and expertise for money, and feel little loyalty to the company.money, and feel little loyalty to the company.

EmployeesEmployees: : members of a community, which members of a community, which holds certain values in common. The holds certain values in common. The company will help the members to reach company will help the members to reach their individual potential, because it is their individual potential, because it is understood that this is in the company’s self-understood that this is in the company’s self-interest.interest.

ONLY LIVING BEINGS LEARN

• Play and learn• The “persona” represent body and soul together

- Goal Oriented, it want live as long as possible and realize the development of its potential from its talent and aptitudes - Conscious of Itself, a persona can perceive itself as “I”, although it is composed of parts of elements, which are personae in their own right- Open To The Outside World, element from the outside-such as food, bacteria, dust, light, and sound constantly enter the human system. At the same time, s persona is constant relationship with the outside world, in the sense that every experience represents one more exchange in lifelong dialogue with the force of the world around it - Alive, But Finite Lifespan, one day it is born and one day it will pass away

LIFESPAN OF A COMPANYLIFESPAN OF A COMPANY

Average life expectancy of Fortune 500 Company is 40-50 years.

1/3 of Fortune 500 companies in 1970 had vanished by 1983. (13 years!)

Recent study 1996 Stratix consulting group - Amsterdam - average life expectancy of all firms, regardless of size, is 12.5 years (Japan and Europe).

Features of Long Lived Companies

Shell study of companies older than Shell (.100 years) 27 in detail, of 40. Why did they survive?

1. Sensitive to their environment (in harmony with the world around them – tuned to what was going on).

2. Cohesive, with a strong sense of identity. (People felt part of them - community

- managers chosen from within - "stewards").3. Tolerant (of activities on the margin - experiments, ccentricities...

- did not exert overly centralised control).4. Conservative in financing (frugal, money in land – could

pursue options their competitors could not)

Memory of the Future

How do companies anticipate the need for change?Why doesn’t a company see what is happening?

• Managers are stupid• We can only see when a crisis opens our eyes• We can only see what we have already experienced• We cannot see what is emotionally difficult to see• We can only see what is relevant to our view of the future

Learning Processes

• Insatiable Demand for Predictions

• Management View take s future as “Falistically” given

• Producing Uncertainty trough prediction

• Anticipating possible future and preparing for them

Prediction Planning Scenario Planning

DECISION MAKING AS A LEARNING ACTIVITY

Perceiving

Acting

Concluding

Embedding

Learning by Assimilation Vs Learning by Accommodation

The Titmouse and the Milk BottleInnovation as individuals or

communitySocial propagation - established

process for transmitting a skill from individual to company

Mobility - individuals move around rather than settling in isolated territories

FLOCKINGFLOCKING

The Tolerant CompanyThe Tolerant Company

• Tolerance wastes resources• Letting things “happen” at the margin• Diversification by tolerance vs diversification by

Dictum• Parable of Chilean Potato• Intolerant companies live long and do well IF they have

control over the world they live in

The Corporate Immune System

Corporate body, like human body, needs immune system Limit to openness and tolerance Mergers and acquisitions…

- like infections- failure rates around 50-75% (Porter)

ParasitesCan exist anywhere in corporate host body

Members will retire, whereas parasites will serve for their own sweet time and leave by different route.

Money is not enough of an incentive but moneyneeds a lot of attention in a living company

Conservatism in Financing

• Money is important

• Entrepreneurs with high debt/low equity

underperforms

• Long lived companies have money in hand

• “Stewards, not gamblers”

• Long term survivor does not define life in economic terms, but in evolutionary terms

• Cost of “company deaths”

CONCLUSIONCONCLUSION Profit is not a guarantee for a long live company but it is

the symptom for a health company You will still not have institutional learning until you

develop the ability to flock that needs two criteria: mobility of people and mechanism of social transmission

The decision for action made by this living being result from a learning process

Company should not all live forever, but a reduction corporate mortality seem advantageous

Any movement to the philosophy of the living company will take time, it will evolutionary rather than revolutionary

BOOK REVIEW

GOOD TO GREAT (2001) Jims Collins “LEVEL 5 LEADERSHIP”“LEVEL 5 LEADERSHIP”

COMPETING FOR THE FUTURE (1994) Gary Hamel and C.K Prahalad “KNOWLEDEGE“KNOWLEDEGE”

THE FIFTH DICIPLINE (1990) Peter M Sange “THE LEARNING “THE LEARNING

ORGANIZATION”ORGANIZATION”

THE LIVING COMPANY

(1996) Arie de Geus

““THE COMPANY THE COMPANY IS A LIVING IS A LIVING

BEINGBEING””BUILT TO LAST (1994) Jims Collins and Jerry I.Porras “ CULTURE AND CULTURE AND DICIPLINE”DICIPLINE”

THANK YOU FOR YOUR KIND ATTENTION

COMPETING FOR THE FUTURE (1994) Gary Hamel and C.K Prahalad “KNOWLEDEGE“KNOWLEDEGE”

Managing for Profit or Longevity

Is there a choice?Economic or “puddle” company

- a viable choice - hard to be a learning organisation

Living or “river” company- high/low (flow) but permanent- self perpetuating, maintains identity- ROI still important

Managing for Profit or Longevity

Is there a choice?• Economic or “puddle” company

- a viable choice - hard to be a learning organisation

• Living or “river” company- high/low (flow) but permanent- self perpetuating, maintains identity- ROI still important

Economic Companies vs. Living Economic Companies vs. Living CompaniesCompanies

Discipline and Cohesion: are maintained hierarchical control, often highly centralized.

Discipline and Cohesion: are based on through the trust that results from the understanding that both the company and its members will adhere to their obligation of mutual development of the potential.

Entry-level Recruitment: handled by the numbers, and seen as filling the necessary positions to best serve the asset base of the company.

Entry-level Recruitment: seen as a rite of passage, representing the first moment for testing the fit between the new member and the community.

Executive Recruitment: often brought in from the outside.

Executive-Level: usually promoted from within the organization.

Governance: Sacrifices its people when necessary to maximize profit and shareholder value.

Governance: Sacrifices assets over people when necessary to ensure the company’s long-term survival, even at the expense of the shareholder.

Learning Abilities: centralized control reduces the space in the organization, and thereby, it’s learning abilities.

Learning Abilities: trust allows space and tolerance both inside the hierarchy and towards the outside world, resulting in higher levels of institutional learning.

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