In The Collapse of Complex Societies (ISBN 978-0521386739), Joseph Tainter observes that societies adapt to meet the challenges of growth by increasing their complexity. Over time, societies receive diminishing marginal returns on their investment in complexity. When they reach the stage that the demands of the complex organizational structure exceed the capacity of the resources available to support it, they collapse. It seems as if established, complex societies cannot respond to this challenge by simplifying their own structure. Instead, they collapse into smaller, simpler societal groups that may then begin the process of growth and increasing complexity all over again. The author examines the collapse of notable, successful, complex societies such as the Mayan and Roman empires and the Anasazi civilization centered on Chaco Canyon.
I can’t help noticing the resemblance between the pattern of growth and collapse in historical states and empires and the pattern of growth and collapse in corporations. It seems as if corporations, like states and empires, undergo a process of increasing complexity as they learn to deal with competitive challenges and as they increase their market share, their size, and the scope and range of their business activities. Historian Arnold Toynbee famously described the pattern of ascendance and decline of civilizations in terms of internal moral decay. The anonymous author of a Wikipedia article on Societal Decay put it quite nicely when he or she wrote, "societies that develop great expertise in problem solving become incapable of solving new problems by overdeveloping their structures for solving old ones."
It is a "circle of life" pattern. Corporations rise when their creative ideas generate innovation that stimulate the economy. They decline when their thinking ossifies and they lose the ability to adapt to change. They collapse, leaving former employees free to innovate and to form new, creative companies to pursue fresh ideas. Then the cycle repeats. As in nature, this sort of cycle is healthy for the economy; it allows the old to die and the young to test their ideas in the crucible of the marketplace.
When companies are part of a larger organization, such as a nation-state, nature is not always allowed to take its course. We saw this effect in the financial crisis of 2008-2009, when the US government deemed some of the declining corporations "too big to fail," and handed them free money from tax coffers to sustain them and to enable them to occupy space in the market that would otherwise have been taken by creative entrepreneurs, in much the same way as a molecule of carbon monoxide occupies a receptor site for oxygen, causing the organism to die.
A government bail-out is more akin to reanimating dead tissue a la Frankenstein than to restoring true health. Fortunately, it is not the only way a company can avoid death. It is possible for the leadership to recognize the need for new thinking and new approaches to problems. Change is inevitable; death is optional. But choosing life over death may not be as simple as it sounds. The models of societal growth and decay offered by Toynbee and Tainter may provide clues about the nature of large organizations that help us understand why so many large corporations choose decay and death. Understanding that nature may help at least some corporate leaders make better choices.
Toynbee, Tainter, and business
In Toynbee’s historical model, civilizations pass through several distinct phases: Genesis, growth, time of troubles, universal state, and disintegration. The model strikes me as very similar to the pattern of life we all experience as individuals: Birth, childhood, adolescence, adulthood, and old age. Corporations can’t reverse the pattern and revert to a simpler, more nimble, more innovative form any more than we as individuals can "grow backward" toward childhood.
Toynbee calls those who figured out how to solve the "old problems" the Creative Minority. Over time, the Creative Minority transforms into the Dominant Minority. No longer creative, they force the majority to comply, and they forget how to embrace new ways of thinking. The Wikipedia article author writes, Toynbee "argues that creative minorities deteriorate due to a worship of their ‘former self,’ by which they become prideful, and fail to adequately address the next challenge they face." The Universal State comes into existence when the Creative Minority transforms into the Dominate Minority, and innovation beyond the well-defined boundaries set by the leadership is no longer tolerated.
Toynbee sees the root cause of the decline of civilizations as mainly a question of moral or spiritual decay from within. With the rise of the Universal State and the suppression of creativity and innovation in the name of conformity with the Dominant Minority, people become jaded about the spiritual values of the society. For that reason, the ancient Romans eventually stopped believing in the traditional gods, became cynical about the notion of emperor-worship, and were mostly skeptical of then-emerging alternative religions such as Christianity and Mithraism. They had lost their spiritual compass.
In the context of business, the equivalent of a spiritual compass is a company’s core values. Every company starts out with a set of core values with which the founders all agree — these are the ways in which we want to make the world a better place; here is our plan for doing so; and this is the line we will not cross to achieve our goals, for ethical reasons. Most new companies set their core values down in writing and the founders pledge to honor them. When the company reaches the point that it begins to grow rapidly — that first big sale, first big account, or first market-changing innovation — people start to deal with the practical challenges of rapid growth and forget the original core values. Pretty soon the corporate equivalent of the Universal State settles into place, and the old Creative Minority turns into a Dominant Minority that worships their own "former self," or perhaps a sanitized and glamorized image of the "former self."
Tainter’s model shares some elements with Toynbee’s, but focuses more on the inverse relationship between a society’s investment in complexity and the return on that investment over time. When the point of diminishing returns is reached, the society collapses. Thus, archaeologists find unfinished stonework and workers’ tools among the remains of Mayan cities, left in place when the workers walked away. I find the many parallels with the business world interesting.
Complex societies … are at least partly built up of social units that are themselves potentially stable and independent, and indeed at one time may have been so. Thus, a newly established state may include several formerly independent villages or ethnic groups, or an empire may incorporate previously established states. (Tainter, page 23)
Large corporations are at least partly built up of smaller organizations that are themselves potentially stable and independent, and indeed at one time may have been separate companies that were acquired by the larger firm. Thus, a large corporation may include several formerly independent companies.
Personal political ambition is either restrained from expression, or channeled to fulfill a public good. […] [P]olitical organization extends beyond the community level. Accordingly, economic, political, and ceremonial life transcend purely local concerns. […] There is a political economy in which rank conveys the authority to direct labor and economic surpluses. […] Economic specialization, exchange, and coordination are characteristic features. (p. 25)
Real innovation and out-of-the-box thinking are either restrained from expression or channeled to fulfill an objective of the leadership. Economic, political, and ceremonial functions transcend purely departmental concerns. There is a political economy in which rank conveys the authority to direct labor and allocate resources. Functional specialization, formal interaction between functional silos, and coordination across administrative boundaries are characteristic features of large companies.
Occupational specialization is a prime characteristic, and is often reflected in patterns of residence. (p. 27)
Functional silos are a prime characteristic, often reflected in formal organizational structures in which individuals are slotted into management hierarchies dedicated to occupational specialties.
[A] ruling authority monopolizes sovereignty and delegates all power. […] This ruling class supplies the personnel for government, which is a specialized decision-making organization with a monopoly of force, and with the power to draft for war or work, levy and collect taxes, and decree and enforce laws. (p. 27)
A ruling authority at the top of a hierarchical power structure monopolizes decision-making. This ruling class determines who is or is not on the "fast track" for promotion up the hieararchical chain of authority. Management is a specialized decision-making organization with a monopoly of force and with the power to hire, fire, and assign personnel as it sees fit, to establish and control employee compensation and benefits, and decree and enforce workplace rules.
The government is legitimately constituted, which is to say that a common, society-wide ideology exists that serves in part to validate the political organization of society. […] States tend to be overwhelmingly concerned with maintaining their territorial integrity. This is, indeed, one of their primary characteristics. (p. 27)
Management is legitimately constituted, which is to say that a common, company-wide ideology exists that serves in part to validate the organizational structure of the firm. Corporations tend to be overwhelmingly concerned with maintaining the business models and operational standards that were devised by the original Creative Minority, even after those things have ceased to serve the company’s interests.
Despite an institutionalized authority structure, an ideological basis, and a monopoly of force, the rulers of states [have] the need to establish and constantly reinforce legitimacy. […] [L]eadership activities and societal resources must be continuously devoted to this purpose. […] No societal leader is ever far from the need to validate position and policy, and no hierarchical society can be organized without explicit provision for this need. (p. 27)
Large companies indulge in a variety of rituals and ceremonies that aim to reinforce the legitimacy of the management elite in the eyes of employees, stockholders, customers, business partners, and the public. They frequently reorganize, although not to the extent of questioning assumptions about functional specialization or administrative structure, or making deep changes in the established power hierarchy. They frequently announce process improvement initiatives such as Six Sigma, TQM, Kaizen, Lean, and others. They frequently engage outside firms to survey employee opinion, or solicit employee feedback through internal suggestion-box mechanisms of one kind or another. All these activities serve to remind everyone of exactly who is in charge. Usually, they have little lasting or meaningful effect beyond that.
Decline in support will not necessarily lead to the fall of a regime, for to a certain extent coercion can replace commitment to ensure compliance. Coercion, though, is a costly, ineffective strategy which can never be completely or permanently successful. Even with coercion, decline in popular support below some critical minimum leads infallibly to political failure. (p. 27)
In many large corporations, employees just perform the functions assigned to them without giving much thought to the company’s overarching mission or business goals. They do the things on which their performance is measured so that they will receive the standard pay rises and bonuses that accompany a "satisfactory" performance evaluation. They mock the ridiculous procedures that may once have added value even as they perform those procedures to the letter. Their true passion and the bulk of their emotional and mental energy are reserved for their families and hobbies. Their innate creativity and intelligence are unavailable to their employer.
Death is optional
It may be true that the Romans and the Mayans couldn’t conceive of a different way of thinking, and followed the usual pattern through decay and dissolution, but a modern-day corporation doesn’t have to fall victim to the same pattern. If the Dominant Minority is able to maintain an open mind about new ideas, they can lead their company through economic change time and again. Two examples from my own past experience illustrate this.
In the mid-1980s, I worked with a division of JCPenney known as Business Services. The organization operated a transaction processing network across the United States. That doesn’t sound unusual today, in the age of the Internet, but at the time it was unique. JCPenney was, and still is, a company whose primary business is retail store operations. They developed the network to support their own needs for point of sale credit authorization services. They realized that the facility could become a revenue generator in its own right, and they began to sell credit authorization services to other companies. Eventually, they spun the operation off and it became part of a new company formed in 1996, Alliance Data Systems. Today, in 2012, both JCPenney and Alliance Data Systems are still in business and profitable. Recently, JCPenney announced changes in its operating model that represent yet another adaptation to changing market conditions. The leadership of these two companies have not lost their original flexibility and innovative spirit.
A counterexample is a financial services firm where I worked in the early 2000s. The company followed the pattern described by Tainter. By early 2008, the company’s complexity could no longer be supported by its revenues. The leadership begged investors for a $7 billion-with-a-B cash infusion to keep the company afloat. When the financial crisis struck in late 2008, they had no way to absorb the shock. It wasn’t long before the company was bought out by a competitor. It no longer exists.
I recall that the management of the IT department at that company perceived their department as a sort of "external" service provider to business stakeholders in the firm. They had established a working relationship with the rest of the company in which line-of-business managers would request IT services, such as a new business application, and the IT department would submit a bid to the line of business for doing the work. Since they seemed to like the model of the external service provider, I proposed that we respond to RFPs from outside the company, so that we could use our delivery mechanism to generate revenue directly. IT management were shocked and appalled at the suggestion. It broke all the existing rules and represented innovative thinking beyond the boundaries they had established. I was severely reprimanded for floating the idea.
In hindsight, my suggestion was very much like the one someone had made long earlier at JCPenney, to use their credit authorization network to generate revenue, and to transform Business Services from a cost center into a profit center. That suggestion, apparently, had been more warmly received.
The point is that we can learn from the patterns observed in history. It isn’t necessary to fall prey to the same pattern of decay and death over and over again. It may be that nation-states can’t avoid the pattern, but corporations can. It all comes down to the choices they make.