is well established that approximately 50 % of all new ventures will fail within five years. For every Southwest Airlines that succeeds, there is a People Express that goes bankrupt. For every Facebook, there is a Myspace that was once popular, but that is now an afterthought. For every Starbucks, there is a Diedrich Coffee that failed. For every Dell, there is an Osborne Computer (who very few people even remember – even though it reached $100 million in sales revenue in three years before going bankrupt, and was a leader in personal computers prior to the founding of Dell).
It is a great achievement to create a successful start-up, given their 50 % failure rate. It is an even greater challenge to create a company that is sustainably successful over “the long run.” As we view it, the long run relates to sustainable success over several decades. At a minimum, it involves success over at least two generations of company leaders. In sports such as baseball, basketball, or football, it is possible to have sustained success with a specific group of players and a single coach; but true “sustainable success over the long run” exists only when leadership has passed from generation to generation with sustained success. One company that has achieved this is General Electric (GE). Founded in 1878, GE continues to be a global leader. Another is Heineken, the Netherlands-based beer company. Heineken was founded in 1864, and also continues to be a world leader in its space. A third is Toyota. Toyota, focused on the production of automobiles, was founded in 1933 as a department of Toyoda Automatic Loom Works, which itself traces its history to 1926. Toyota Motors was created as a spinoff from the parent company as Toyota Motor Company in 1937.
Sustainable success for a long period is very challenging, but possible, as shown by GE, Heineken, and Toyota. It is difficult even over a relatively shorter period such as 15 years. A comparison of companies listed on the Nasdaq stock exchange from 2000 to 2015 shows that there were significant changes in the composition of the top listed companies by “market cap” (market capitalization, the standard measure of a public company's value).2 Only three companies were in the top 10 on both dates: Microsoft, Intel, and Cisco. Several companies that were listed as among the top 10 in 2000 were no longer on the list in 2015, including Dell, Sun Microsystems (purchased by Oracle), JDS Uniphase, and Yahoo!.
Organizational Success, Decline, and Failure
Why are some companies able to continue to manage growth successfully over the longer term (at least 10 years) while others are not? Why are some company founders and leaders like Howard Schultz at Starbucks and Richard Branson of Virgin Group able to continue to grow with their companies, while other founders and leaders such as Donald Burr, who founded People Express (and who had an MBA from Harvard!) or Adam Osborne, who founded Osborne Computer, fail to make the required transitions as their businesses increase in size and complexity? What do successful companies and their leaders do differently compared with those that are less successful or even those that have failed? Is it simply chance or something that can be learned and managed?
Through rigorous research and analysis of organizations and their leaders over the past four decades,3 we have answered these questions and have developed practical tools that can help leaders of companies at all sizes increase their probability of long-term success. Why, for example, did Starbucks Coffee (originally founded as a local roaster with stores in 1971 and later reconceived in 1986–1987 as a “specialty retail/café” hybrid) become a global brand and industry leader,4 while Diedrich Coffee (which was similarly founded in 1972 and later redefined like Starbucks as a cafe in 1983) has been broken into pieces (company stores and franchised stores) and sold to competitors including Starbucks?5 How did Starbucks become the global leader in its space even though other companies like Coffee Bean and Tea Leaf (founded 1963) and Peet's (founded 1966) existed before Starbucks was ever purchased and refocused? As we will see in the next chapter, Starbucks' success is not an accident, nor is it unique. The keys to Starbucks' success were some critical transitions made both by its founder and CEO, Howard Schultz, and by the organization itself. Starbucks developed and followed a plan, not just a classic strategic plan but one that focused upon organizational development as well.
We shall describe this in some detail and distill the lessons for other company founders and their organizations.
Lessons like these are not only important for the founders of entrepreneurial companies like Howard Schultz, Steve Jobs (Apple Computer), or John Paul DeJoria (Paul Mitchell hair products and Patron Spirits Company), they are important for venture capital and private equity investors, boards of directors, banks that lend to such companies, managers of such companies, and students of management who aspire to either start their own business or work in a company going through such transitions over time. They are also of importance to society as a whole. Companies create jobs. Successful companies create more and more jobs, while failing companies destroy jobs. For example, successful companies such as Starbucks, Google, and Apple are job-creating machines! However, when companies like Borders (retailer of books), Woolworths (specialty department store), People Express (airline) and Osborne Computer (computer manufacturer) fail, they destroy jobs and people's livelihood, and negatively impact lives.
Government programs to stimulate companies' growth have been established in countries such as Canada and Poland for just this reason. Canada created the Build in Canada Innovation Program (BCIP) to kick-start businesses and get their innovative products from the lab to the marketplace. The government of Poland has created the Polish Agency for Enterprise Development. It is a tragedy when a company fails after a promising entrepreneurial start because the entrepreneurs do not understand how to build the organization.
Building Sustainably Successful Organizations®
The purpose of our research and really, what we might describe as our life's work, is to help entrepreneurs and others understand what must be done to build sustainably successful organizations®. We have been helping organizational leaders plan for and implement the transitions required to promote long-term success for almost 40 years. This book will summarize our methods, tools, and insights in a practical and systematic way.
Our research and experience have shown that there are two different but related types of transitions that must be made at different stages of growth in order for an organization to continue to flourish and grow successfully.
One type of transition concerns the founder or ultimate leader of an organization – which is typically the chief executive officer or CEO. This person must make a variety of personal and professional changes or transitions as their company grows. These include understanding and embracing the changes in the CEO role that need to occur to effectively manage an increasingly larger and more complex organization, developing new skills, adopting a new mindset (that supports, among other things, having increasingly less direct control over results), and changing one's managerial style. For simplicity, we term these the “personal transitions.”
The second type of transition relates to the organization's strategic and “architectural design.” These organizational development transitions can include changes in the organization's systems, processes, or structure, as well as changes to what the company actually does (who its target customers are and what it offers them).
If these two types of transitions are not made effectively, they will have a significant impact on organizational effectiveness, efficiency, and success. In fact, the inability to make effective and appropriate personal and organizational transitions is a key underlying reason why organizations experience problems and, in some cases, fail. This chapter will focus on both types of transitions.
The Personal Transitions Facing Founders and CEOs
As organizations grow and change, those in management and leadership roles also need to
Dean Starkman and Russ Mitchell, “Nasdaq: Déjà vu 15 Years Later,”
We have published many articles presenting our models, testing them empirically. We have also published case application articles showing how our frameworks and tools have actually been used.
Starbucks was originally founded by a three-man group in Seattle as a “local roaster,” not a café. Howard Schultz who had worked at Starbucks left to found Il Giornale Coffee in 1986, and then purchased Starbucks and rebranded his company as Starbucks in 1987.
Diedrich Coffee was founded in 1983 by Martin Diedrich. It was an outgrowth of an earlier family business begun as a coffee plantation and then a local roasting store that opened in 1972. Diedrich Coffee went public in 1996. In September 2006, Diedrich Coffee announced its plans to close its company-owned retail stores, 40 of which were sold to Starbucks and reopened under that brand. Diedrich's franchisee-owned stores remained unchanged. The company continued as a roaster and wholesaler of coffee beans, with a few independently owned and operated Diedrich stores that remained open in California and Texas. On November 3, 2009, Peet's announced that it was buying Diedrich, but its offer was exceeded by Green Mountain Roasters, Inc., which currently owns the company.
