Creative destruction and corporate becoming: how important is a CEO?

While today’s business media (and business schools) are much enamored with Silicon Valley-style start-up entrepreneurship, only those startups able to grow into large, complex enterprises (e.g., Google, Facebook, Linkedin, Netflix) materially impact the evolution of the global industrial system. The average lifespan of such large, complex enterprises, however, is on the decline. Research has revealed that the average lifespan of a company in the S&P 500 index (a stock market index that tracks the 500 most widely held stocks on the New York Stock Exchange), for instance, has decreased from 61 years in 1958 to 18 years by 2015, and appears to continue to decline. Similarly, Andy Grove and I have reported that of the largest 100 companies in the US in 1965, only 19 remained on that list in 2005. In other words, the gale of creative destruction, and the more recently identified force of “disruptive technology” did not spare many of the largest US-based corporations that existed in 1965.

Many different reasons, ranging from rapid technological change to over-emphasis on shareholder value maximization and CEO incentives, have been put forward for this decline. The role of effective strategic leadership for corporate longevity, however, remains woefully unexplored. Consider, for instance, a long-lived company like Hewlett Packard. Bill Hewlett and David Packard were among the first of the new breed of high-tech start-up entrepreneurs based in Silicon Valley whose company, founded in 1939, grew its revenues to more than $110 billion by 2015. Hewlett and Packard will maintain their place among the iconic entrepreneurial CEOs of the high-technology industry. However their successor CEO’s have also contributed to the company’s 77 year process of “becoming”; an ongoing process for which no grand ex ante plan is possible, and which unfolds through a series of corporate transformations.

Each of HP’s successive CEO’s had to carry out key strategic leadership tasks:

• Defining the businesses the company wants to be a winner in, and what winning means
• Aligning the company’s distinctive competencies with its product-market position(s) to achieve competitive advantage
• Aligning strategy execution with strategy formulation

They had to do these tasks in a dynamic fashion as the external and internal contexts changed over time. Each of the successive CEOs also had to develop four key elements of the company’s strategic leadership capability:

1. Integrating top-down and bottom-up leadership (encouraging constructive confrontation)
2. Managing the dynamic interplays between a “good and compelling corporate strategy” and a “compatible corporate culture” (creating commitment)
3. Balancing resource allocation between “fit” (pursuing opportunities in the current environment) and “evolvability” (opening up opportunities in new environmental segments)
4. Managing dynamic interactions with the Board of Directors (achieving constructive relations)

The November 2014 decision by CEO Meg Whitman and the board of directors to split HP in two new companies, however, created a major theoretical conundrum: how could such a radical reduction in the size of the company be squared with corporate becoming?

Resolving this conundrum required three steps. First, it suggested that a firm’s size at any given time could be viewed as the by-product of its growth trajectory and that even if a firm’s optimal size could be determined at a particular moment in time, it would most likely be a fleeting optimum because of continuously changing external and internal conditions. Second, it suggested that a firm’s growth trajectory does not necessarily have to incessantly move upwards. It might make strategic sense at some points along the growth trajectory to change the firm’s corporate strategy and structure to reduce its size and thereby put it onto a new, more adaptive growth trajectory. Third, it suggested the conditions for deciding to split off certain businesses from the corporate portfolio: (1) changes in inter-business complementarity (external), and (2) changes in intra-business complexity (internal). This helped to explain why most investors liked the decision to split HP in 2014, whereas they disliked the prospect in 2011.

With these conundrums in mind, the study of strategic leadership reveals some unexpected insights. One is the paradox of corporate becoming: “messy beats perfection”, because it avoids the company becoming locked-in to a static position. Another is the existential situation facing successive CEOs: No CEO after the founders starts with a clean slate. He or she must always deal with the strategic challenges left by their predecessors. This in turn feeds into the importance of the CEO’s ability to harness the company’s past while driving its future. Lastly, it is worth noting that successful corporate transformations are likely to have been preceded by an experimentation-and-selection process that gives the CEO some assurance that the transformation has a good chance to be successful.

Combined, these insights integrate into a dynamic theory of strategic leadership that animates the framework of corporate becoming. This framework offers practical tools for founders of start-ups and CEOs, as well as boards of directors of established firms who intend to create, run or oversee long-lived organizations.

Featured image credit: Lost Places, Factory, Hall, by Tama66. Public Domain via Pixabay.