How To Build “Sustainably Successful Business Organizations:” ? Apple, Nike, Starbucks, and Walmart versus K-Mart, Bed Bath and Beyond et. al.

Author’s Note to Readers:

This newsletter focuses upon various aspects of the development of “Sustainably Successful Organizations.”? Although my original plan for this month’s Newsletter, was to continue the saga of the development of Starbucks, this issue begins a series of articles addressed to what we have learned during the past 45 years about “Sustainable Organizational Success” and why it matters to business owners, Board of directors and investors. Specifically, we will provide a set of lessons learned about how to create a Sustainably Successful Organization And become a leader in your space.

Abstract

Since 1976 my research and organizational applications work with actual companies has focused on two related core questions:

1)????Why are some organizations successful over the long term while other stall-out or even fail (go bankrupt) after promising starts?

2)????What can be done to increase the chances of?sustainable organizational success?

?

·???????These are important, complex questions and answers cannot be reduced to a series of one liners or other instant answers. Instead, this article begins a series of articles addressed to these key issues. It will describe what we have learned from actual experience and systematic research that can help corporate leaders. Specifically, it will examine Lesson # 1: Why some organizations succeed over the long term while others fail after promising starts. Stated differently,?what explains the sustainable success of Apple, Berkshire-Hathaway, Nike, Starbucks, and Walmart ? what explains and the distress and or failure of Peloton, Bed Bath and Beyond, FTX, First Republic and Silicon Valley Bank.

Introduction

“It what you learn after you know it all that counts the MOST”![1]

This simple but deceptively ?profound statement was made by Coach John Wooden, regarded by many as the greatest College basketball coach of all time.?Specifically, Wooden, who is in the Naismith Hall of Fame at Springfield Mass,?was the winner of ten NCAA championships at UCLA. That is more championships not only of any College basketball coach, but more than virtually than any college or university with all of its basketball coaches combined.

Why Do Some Organizations Succeed Over the Long Term While Others Fail After Promising Starts?

This question has guided my own research for many years. Specifically, since 1976 my research and organizational applications work with actual companies has focused on two related core questions:

3)????Why are some organizations successful over the long term while other stall out or even fail (go bankrupt) after promising starts?

4)????What can be done to increase the chances of?sustainable organizational success?

These are important, complex questions and answers cannot be reduced to a series of one liners or other instant answers.

What We have Learned: Lesson # 1

Instead, this newsletter begins a series of articles addressed to these key issues. It will describe what we have learned from actual experience and systematic empirical research that can help corporate leaders, managers, and?Boards of Directors build Sustainably Successful Organizations.

The intent of our research has always been to help corporate leaders and mangers as well as Board of Directors to develop a deeper understanding of what is required to build and maintain?Sustainably Successful Organizations rather than to permit an initially successful organization to drift into mediocrity or even failure (bankruptcy).

The Walking Dead of Organizations

There are many examples of companies that had initial success but later drifted into mediocrity or even failure (bankruptcy).These include, to cite just a few:

·???????Xerox

·???????Sears

·???????Eastman-Kodak

·???????General Electric

Once upon a time, many people said that they wanted to be the next Xerox; today that is certainly no longer the case.

Sears once ruled the world of retail and was “where America shopped”; today Sears is virtually an icon of The Walking Dead of organizations and is where America does not shop!

Eastman-Kodak (Kodak) once ruled the world of Photography and was a leading innovator and technological pioneer; today Kodak is a shadow of its once greatness.

General Electric was once one of the most respected companies in the world; today GE is in the process of revitalization after drastic surgery to redefine it. Indeed,?recent article in the Wall Street Journal questioned whether GE would still exit as GE after yet another divestiture of one of its remaining component parts.

The Walking Wounded of Organizations

In addition, there are also many others which while not quite among the “Walking Dead of companies” are certainly among the “walking wounded.” These include AT & T,?Hewlett-Packard, GE to cite just a few.

The “Business Champions” or?Sustainably Successful Organizations!

In contrast, some companies such as?Apple, Berkshire- Hathaway, Nike, Starbucks, and Walmart continue maintain themselves as “business champions” or ?sustainably successful?organizations! These are the true sustainably successful companies, which have been sustainably successful for decades and decades!

Searching for the Secrets to “Sustainable Organizational Success

For almost a half century of the author has conducted research on organizatrional success and failure and has accumulate a great deal of practical experience as well. ?Let’s look at some of the lessons?that have been learned as part of this investigation.

Lesson # 1: You Win With “Infrastructure” and Especially Management Systems

Based upon my research and practical experience, the first lesson to be learned ?is that organizations think they are primarily competing with products and service, but actually organizations ultimately win with organizational “infrastructure.” More specifically, while products and services do offer competitive advantages, generally these advantages are relatively short term. For example, Pfizer and its partner BioNTech developed one of the first effective Covid 19 vaccines. Although this was a ?great achievement, its economic value to Pfizer was only a few years. What mattered more was and is Pfizer’s ability to create a pipeline of new drugs, which, in turn, is a product of its infrastructure.

What is “organizational infrastructure”? ?Organizational infrastructure consists of the resources,?systems and culture that an organization has created to enable it to operate effectively, efficiently, and profitably over the?long term. An organizations systems include both its systems for day-to-day operations (“operational systems”) and the systems for planning, organization, performance management and culture management (that is, its “management systems” ) which enable it to adapt to change in the environment and internal changes due to growth over time.[2]

Walmart versus K-Mart: A Battle of Infrastructure not Products. To see this clearly, let’s look at the sustainable success of Walmart and its ultimate victory over K-Mart. At the outset, ?it is critical to note that there is virtually no product that Walmart has that is not identical to products offered by K-Mart. They both sell a variety of household items such as Colgate toothpaste, Johnson’s baby power and shampoo, and bottled water.

Needleless in spite of selling identical products, Walmart has historically been highly profitable and highly valued by the stock market, while, Kmart has struggled with its profitability and ultimately entered bankruptcy. This differential result contradicts the notion that you win with products.

If products do not account for differential success, clearly something else must be at work. But what??The answer is organizational infrastructure. Specifically, Walmart’s ultimate victory over K-Mart was attributable to its more effective and efficient use of recourses, its operational systems (especially its world class logistics and information systems), its management systems and it culture.?Regular readers of this Newsletter will recognize these as key components of the Pyramid of Organizational Development.[3]

Clearly products are important; however, products are the result of infrastructure, especially a key component of management infrastructure–strategic planning. ?For example, the recent rapid decline and bankruptcy of Bed Bath and Beyond was nominally attributable to a?shift in its product mix from Premium brands to lower cost (including many private label brands). However, the decision to make that product mix shift, was a result of a flawed strategic planning process.?On the surface, or at least in theory, ?the shift?in merchandising in its product mix from Premium brands to lower cost (including many private label brands) made economic (profit) sense and was attractive because the latter type of products provides higher gross margins to retailers. However, historically customers came to shop at Bed Bath and Beyond because of its inventory of Premium brands; and when the company made its merchandising shift, customers voted with their feet and failed to come ?back to Bed Bath and Beyond. The gross margin earned on goods not sold is zero! Indeed, one hundred percent of nothing is, and always will be, nothing!

Meteoric Successes Followed By Meteoric Failure

Many companies have initial meteoric successes followed by meteoric failure. Historical Examples include:

·???????Osborne Computer (one of the early portable PC companies)?which achieved sale so $100 million in two years, and bankruptcy in year 3!

·???????People Express (a forerunner to Southwest air), which achieved revenue of $1. 6 billion in revenue in a few years, and then went bankrupt, and

·???????MaxiCare (an early success as an HMO), which achieved revenue of $1. 6 billion in a few years, and then went bankrupt.

Initial Success followed By Distress

More recent examples of companies which initially achieved great success followed by distress include:

·???????Peloton

·???????Zoom

·???????Bed Bath and Beyond,

·???????Uber

·???????FTX, and, of course,

·???????First Republic and Silicon Valley Banks.

?

The Underlying Cause: An Organizational Virus?

Examining these examples of organizational distress, it almost seems as though there was an organizational virus like covid that attacked initially successful organizations! Actually, there is an underlying susceptibility of successful organizations to distress and even failure. However, it is not a virus, but rather an inherent weakness that exist in rapidly growing companies that have failed to develop an infrastructure sufficiently robust to support their growth and development. We can identify this inherent weakness that exist in rapidly growing companies that have failed to develop an infrastructure by comparing them to companies which have achieved “Sustainable Organizational?Success.”

?

The Nature of “Sustainable Organizational?Success”

“Sustainable Organizational?Success” refers to or is define as decades of success followed by more decades of success. For example, companies such as Apple, Berkshire-Hathaway, IBM,?Nike, Starbucks, and Walmart have each had decades of success followed by more decades of success.

Why Does “Sustainable Organizational?Success” Matter?

Sustainable Organizational?Success matters for many reasons. Obviously, success is a better outcome than failure and sustainable success is an insurance policy against failure.?Also, the longer the period of Sustainable Organizational Success the greater the return to shareholders. Similarly, the longer the period of Sustainable Organizational Success the less the risk to employees and creditors.

What is the underlying Foundation or Cause of?“Sustainable Organizational?Success”?

In contrast to the general conception, the underlying foundation of sustainably successful companies is not their products! Of course,?products and service do matter! Unfortunately, products are like “one hit wonders ” in music.

Products do matter for a time until they are either out of fashion like the hula hoop or until they are replaced by a superior or just different product like VisiCalc which was replaced by “Lotus 1, 2 3,” which was in turn replaced by Excel and so on and so on.

The Bottom Line: The Real Secret weapon of Sustainably Successful Companies

The real secret weapon of sustainably successful companies is their infrastructure, which provides the ability for self-regeneration over time.?A key component (indeed the core) of that infrastructure, is the organization’s “management system.”

Specifically:

·???????Walmart, Kmart and Sears battled for control of the retail market for consumer products. That battle was won decisively by Walmart, with the losers Kmart and Sears becoming bankrupt.?

·???????Starbucks battled Coffee Bean and Tea leaf, Gloria Jeans, Caribou, Peet’s coffee, and several others ?battle to control the market for a Starbucks type cafe. By the year 2000 that battle was over strategically, and it has been a mop up operation for Starbucks since that time.

What is notable about these battles is that there was no advantage from their product because the products of these the companies were?commodities!

Another Secret and Lesson

Another secret of sustainably successful companies is that they have?invested in the development of developed what we term “comprehensive integrated management systems.” More specifically,?companies that win over the long term?have designed their management processes into an integrated system rather than a mere collection of independent processes.

We will address and provide some global examples of ?this observed superpower of sustainably successful companies in the next issue of this newsletter.

ABOUT THE AUTHOR

About the Author_________________________

Eric Flamholtz is Professor Emeritus, Anderson School of Management, UCLA. He is the founder and President of Management Systems Consulting Corporation, 10940 Wilshire Boulevard, Suite 600, Los Angeles California, 90024. He has served on the faculties at Columbia University, The University of Michigan, and UCLA, and has lectured at Columbia University Executive Development Program, Cornell University School of Hotel Management, Cheung Kong Graduate School of Business (China), Fudan University (China), Shanghai Advanced Institute of Finance (China),??HEC (France), Almaty University (Kazakhstan), CETYS (Mexico), Orestano University (Sardinia),?Stockholm University (Sweden), and?Moscow School of Management Skolkovo (Russia).??His latest book (co-authored with Yvonne Randle, is The Crisis Leadership Playbook, Vandeplas Publishing. 2020.?

FURTHER INFORMATION

For further information about developing integrated management systems, ?see Eric G. Flamholtz and Yvonne Randle, Growing Pains: Building Sustainably Successful Organizations, Wiley 2016. See also: www.Mgtsystems.com . ?

REFERENCES

Dimitrova, A. Illiev, I, and Flamholtz, E. (2016) Strategic Organizational Development and Corporate Culture: Empirical Evidence from Europe, unpublished working paper.

Flamholtz, E. (1995). Managing Organizational Transitions: Implications for Corporate and Human Resource Management. European Management Journal, 13(1), 39-51.

Flamholtz, E. (1996). Effective Management Control: Theory and Practice. ?Norwell, Massachusetts: Kluwer Academic Publishers.

?

Flamholtz, E. (2000). Corporate Culture and the Bottom Line. European Management Journal, 19(3), 268–275.

Flamholtz, E. (2003). Putting Balance and Validity into the Balanced Scorecard. Journal of Human Resource Costing and Accounting, 7(3), 15-26.

Flamholtz, E. & Brzezinski, D. (2016). Strategic Organizational Development and Growing Pains: Empirical Evidence from Europe. International Review of Entrepreneurship, 14(1).

Flamholtz, E. & Hua, W. (2002A). Strategic Organizational Development and the Bottom Line: Further Empirical Evidence. European Management Journal, 20(1), 72-81.

Flamholtz, E. & Hua, W. (2002B). Strategic Organizational Development, Growing Pains, and Corporate Financial Performance: An Empirical Test. European Management Journal, 20(5), 527-536.

Flamholtz, E. G. (2002). Towards an Integrative Theory of Organizational Success and Failure: Previous Research and Future Issues. International Journal of Entrepreneurship Education, 1(3), 247-272.

Flamholtz, E. (2009). Towards Using Organizational Measurements to Assess Corporate Performance, Journal of Human Resource Costing and Accounting, Volume 13, Issue 2, pp. 105-117.

Flamholtz, E. G. & Aksehirli, Z. (2000). Organizational Success and Failure, An Empirical Test of a Holistic Model. European Management Journal, 18(5), 488-498.

Flamholtz, E. G. & Hua, W. (2003). Searching for Competitive Advantage in the Black Box. European Management Journal, 21(2), 222-236.?

Flamholtz, E. & Kurland, S. (2005). Strategic organizational Development, infrastructure and Financial Performance: An Empirical Test. International Journal of Entrepreneurial Education, 3(2), 117-142.

Flamholtz, E. & Randle, Y. (1998). Changing the Game: Organizational Transformations of the First, Second, and Third Kinds. New York, New York: Oxford University Press.

Flamholtz, E. & Randle, Y. (2011). Corporate Culture: The Ultimate Strategic Asset. Stanford, California: Stanford University Press.

?

Flamholtz, E. & Randle, Y. (2016). Growing Pains: Building Sustainably Successful Organizations. Hoboken, New Jersey: John Wiley & Sons.

Meyer, M. (2002). Rethinking Performance Measurement: Beyond the Balanced Scorecard. Cambridge, United Kingdom: Cambridge University Press.

Quinn, R. E. & Cameron, K. (1983). Organizational Life Cycle and Shifting Criteria for Effectiveness: Some Preliminary Evidence. Management Science, 29 (1), 33-51.

Randle, Y. (1990). Towards an Ecological Life Cycle Model of Organizational Success and Failure. Los Angeles, California. Unpublished Ph.D. dissertation, UCLA.

Starbuck, W. H. (1965). Organizational Growth and Development. In March, J. G. (ed.) Handbook of Organizations. Chicago, Illinois: Rand McNally.

Footnotes

[1] Coach John Wooden, winner of ten NCAA basketball championships at UCLA.

[2] For a more detailed discussion, see Eric G. Flamholtz and Yvonne Randle, Growing Pains: Building Sustainably Successful Organizations, Fifth Edition, Wiley, 2016

[3] For a more detailed discussion, see Eric G. Flamholtz and Yvonne Randle, Growing Pains: Building Sustainably Successful Organizations, Fifth Edition, Wiley, 2016

?

?