Mar 1, 2017 Growth

Adizes Corporate Lifecycle - How Companies Grow and Die

Adizes Corporate Lifecycle - How Companies Grow and Die

What do giants like McDonald's, Apple, Starbucks, and Walmart have in common, besides having more than 100,000 employees?

They all started small with no more than a few people and then grew. Can you imagine the road Walmart had to journey from a humble Five and Dime store in Arkansas to a global empire consisting of 11,000+ worldwide stores and 2.3 million employees?

During that growth, they had to change how they work and each growth stage brought new challenges.

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All the big companies go through the same growth stages, regardless of the industry.

Apple had the same problems going from 2 to 30 to 1,000 as did Ogilvy & Mather.

If you want to grow your company, it's useful to know how other companies grew and what challenges they faced. Once you know the typical path, you can avoid common mistakes entrepreneurs make when leveling up.

Life stages every business goes through

Ichak Adizes, one of the world’s leading management experts, has developed a methodology that describes the typical lifecycle every company goes through. He compares company growth to human growth where a company grows, ages, and ultimately dies. There are 10 stages and each brings its unique set of challenges.

Growth Stage 1: Courtship

Every business starts as a vision in somebody's head, an idea. The would-be founder dreams up all the thing they could do and spends days and nights in crafting ambitious plans for the future. They tell everyone about their idea, enthusiasm runs high, and everything is rosy. But there is a nagging concern: "What if it doesn’t work? What if I fail?"

This stage is called courtship because the founder flirts with the idea of starting a business but hasn't taken any concrete steps. To get to the next stage, a founder needs the courage to take a risk and commitment to follow up on that idea.

The courtship stage ends the minute the founder decides to make a commitment and assumes risk (like renting space, acquiring equipment, or taking a fulfillment order).

Danger: Affair

A business can die before it's even born if the founder doesn't make a commitment and abandons the idea.

Growth Stage 2: Infancy

Once a founder takes the risk, a business is born. An idea becomes reality and it needs to start producing results. Each sale is a special event and everything is action-oriented. Business will do anything for a sale. There are no processes or systems, and nobody pays any attention to paperwork.

Founders work 16 hours a day, every day. They don't have time for personal life because the business that needs constant attention is like an infant. Decisions are crisis-driven. There are new problems every day so rules and best practices are created along the way. Energy is high, consistency is low.

In order to secure positive cash flow, long-term planning takes a back seat. Everyone is busy trying to keep the business afloat. Firefighting is the way of life. Each day brings unique situations which require creativity and the ability to make decisions quickly.

Introducing processes this early is a mistake because things change too fast. What worked one day won’t necessarily work the next. Founders are deeply involved in the technical work and day to day operations and delegate only if forced to.

Danger: Infant Mortality

There's a great possibility the business will die due to a lack of sales or commitment from the founder, negative cash-flow, or if the company stays in infancy too long (at which point people will give up due to continuous pressure and no compensation).

Growth Stage 3: Go-Go

The business is making money consistently and growing rapidly. The company is optimistic, confident, proud, and takes on more than it can handle. As a result, it has to grow rapidly. It has a vision about where it can be and there are opportunities around each corner.

The business tries to chase every opportunity it gets and has trouble staying focused. People are spread thin due to all the work. New people are introduced but there aren't enough processes to coordinate everyone. Work gets sloppy and quality suffers.

Founders organize the company around people rather than functions but keep interfering in everyday work. They keep trying to run everything but they keep dropping the ball. They need to hire their first managers and offload control and decision-making.

Danger: Founder’s Trap

If the founder doesn’t delegate control, the company's growth becomes limited by how many people they can personally manage. The founder ends up a bottleneck. They have to decentralize decision-making so people can pursue initiatives without having to ask permission for each and everything.

Growth Stage 4: Adolescence

As the founder lets go and hire chief operating officers, the company needs a new organizational chart. The transition from Go-Go to Adolescence is often rocky and filled with internal conflicts as founders have trouble handing over the reins. This happens because the professional managers see the work as just another job, while the founders see the company as their life.

During adolescence, the company suffers a temporary loss of vision due to conflicting attitudes. Too many projects are started in the Go-Go but few are followed through. So the new management’s first job is to consolidate existing projects and reorganize. They also need consistency and a way to measure progress. So, they introduce processes.

A company in adolescence is in constant conflict and confusion, like a teenager. Leaders can't agree on a direction and what risks to take. But once they resolve their conflicts, the company reaches its prime.

Dangers: Divorce

If management can't resolve their conflicts, one of the two things happens:

  • Unfulfilled Entrepreneur: Professional managers leave the company and the company stops growing, thus failing to reach its full potential.
  • Premature Aging: The founders decide to retire or sell the business. Administratively-oriented technocratic managers take over and cut costs, which briefly improves profit. But then they run out of ideas. Without a creative energy and founders vision, the company stops growing and stagnates.

Growth Stage 5: Prime

When the management and the founders settled on a clear vision, magic happens. The company reaches its prime and everything comes together. Efforts are disciplined yet innovative. The company is agile and produces results consistently thanks to strong processes.

It has the same energy and aggressiveness like in the days of Go-Go, only it's much more predictable. Due to having more people, it can accomplish more, do it better, and make gains in efficiency due to the constant improvement of processes.

The management has a strategy for improving services/products and employee satisfaction. Companies in their prime have trouble finding talent because their standards are high and they need a lot of people. At this point, they start developing talent in-house instead of relying on the outside.

The biggest danger for companies in the prime is complacency and becoming satisfied with its success.

Growth Stage 6: Stability

The transition from prime to stability happens so quietly and take so long that no one even notices. But this is the most profound transition as it marks the beginning of the end.

The company is now the industry leader but it doesn't have the same drive and hunger as before. The company welcomes new ideas but with less enthusiasm. Financial people are running the company and in order to please the shareholders they focus on short-term results rather than investing in R&D, which is needed for future growth.

The top management becomes comfortable and doesn't want to change the status quo. They have a success formula and are reluctant to touch it. Company politics also become an issue. People are more focused on how something is done and processes than what is done.

The company is so big by this point that it’s very slow to answering changes. The only way from this stage is down.

Aging Stage 1: Aristocracy

As company ages, it refuses to change how things are done. Leaders rely on the past to carry the company forward, but that’s not possible. Companies die if they don’t grow and change. But making waves and innovating are discouraged in aristocratic companies. So the company starts to degenerate.

It starts losing touch with the market and outside conditions. The company makes more money than ever before but it has no new initiatives where it will invest that money. Management at this stage often rewards themselves with hefty bonuses and huge salaries.

The company stops investing in its own new initiatives but it does spend some money, mostly in acquiring young and innovative startups. This way, it tries to inject vitality back into the organization but the acquired startups only get suffocated due to the heavy top-down administration and bureaucracy.

People in the company place greater importance on dress code, decor, and titles than the actual work. Working in the company begins to feel like belonging to an exclusive country club. Poor performance is tolerated while new ideas are discarded because they threaten the establishment.

The company starts to lose touch with the market and slowly loses customers. No one wants to deliver the bad news to the top until it becomes too late to do anything about it, which sets the scene for the next stage.

Aging Stage 2: Recrimination

When management can no longer hide that profits are going down, they start a witch hunt. They spend all their energy on finding a scapegoat and someone to blame, instead of channeling that energy to fixing the problem. Executives fight to protect their turf and there is a lot of backstabbing and petty jealousy.

Managers, usually the most productive ones, either leave or get kicked out. Purges and infighting continue while customers are treated like inconvenient annoyances that distract from the "real problem" of finding the guilty. However, once the scapegoat is found and removed, the problems remain because the problem is not in individuals but the system.

In order to get their profit back, the company focuses on cutting costs, which only hurts the business further.

Aging Stage 3: Bureaucracy

The witch hunt drives away any remaining talent and hope for salvation. A new CEO comes to fix the chaos and turbulence. But the new CEO values stability, processes, and repeatable execution, which starts a creative death spiral. The creative people start to leave, yes-men take over senior roles, and company culture changes completely.

All that remains are procedures, policies, and paperwork that choke innovation. The company relies on minute work specifications because it tries to escape the chaos of the previous stage.

At this point, the company is on life support and it can no longer generate a profit because almost all the customers have left due to neglect. The only reason the company is still alive is that some kind of external subsidy keeps it afloat, (eg. it's in a regulated environment and has political relevance or it’s of national interest so the government takes over). But once the subsidy is removed, it's the end.

Aging Stage 4: Death

Company death is a slow and drawn-out process which can take several years. Once the company can't generate the cash it needs to cover its costs, it starts reducing its size and selling its assets.

The company is a sinking ship but no one feels the responsibility to end it. People simply leave or get laid off until no one remains and the office lease expires.

Adizes Corporate Lifecycle provides great insight into how a company changes as it grows. There is also Greiner's growth model, which focuses more on how management changes as you grow.

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