The Living Company

Citation

Smith, L. (1999), "The Living Company", Journal of Organizational Change Management, Vol. 12 No. 6, pp. 562-578. https://doi.org/10.1108/jocm.1999.12.6.562.1

The Living Company is an expression of Arie De Geus’s belief, based heavily on research undertaken during his tenure at Shell Group Planning, that some organisations behave as if they are living entities in themselves and that they “do business to exist”. De Geus calls these “living companies” and states that they tend to be sensitive to their environment, tolerant of new ideas and thinking, have a strong sense of identity and are financially conservative.

The research undertaken at Shell found that of the Fortune 500 companies listed in 1970, more than 30 per cent had disappeared by 1983. The average life expectancy of a Fortune 500 or major multinational was just 40 to 50 years. Shell was seeking the answer to surviving a fundamental change in its world – the exhaustion of oil, and thus the answer to its corporate longevity.

Shell discovered that the large companies that had survived more than 100 years, despite a fundamental change in their world, shared characteristics quite foreign to mainstream theories. Indeed their raison d’être was quite removed from the maximisation of short‐term profit and shareholder return. De Geus coined the term the “living company” in contrast to the prevailing metaphor of company as machine. The primary feature of living companies seemed to be a desire to survive and develop their own potential. Essentially the companies were seen to be highly sensitive to their environment – they adapted by foresight rather than responding to crisis and they had a strong identity built around a cohesive set of shared values and beliefs. Living companies were tolerant, of new members, of new ideas and new directions – they provided space and support structures for people and teams to make mistakes and learn from them. Last, they were frugal in financial matters, preferring the flexibility afforded by cash reserves and avoiding rapid and dislocating growth by forced acquisition.

Like a living organism, living companies are sensitive to their environment, and aim to adapt as quickly as possible to changing conditions and competitive pressures. For rapid change to be possible, the entire organisation must be focused on perceiving the environment, learning how to change and be capable of making the decision to change.

Shell’s approach to the resistance usually associated with change was to seek to remove the fear of the unknown, the fear of failing and the fear of making mistakes. They did this by focusing on group learning, encouraging structures to support people’s participation in decision making and the creation of shared knowledge and new ideas. People were afforded the space to make mistakes and learn from them in a guilt‐free and blame‐free environment. Decision making was seen as group learning and the best decisions were felt to come from the contribution of the largest number of minds.

It was recognised that resistance to change is overcome with learning and knowledge, and that learning begins with perception. Typically people fail to act before an impending crisis because they fail to perceive a problem or threat. People tend to “see” what they have experienced before, what is relevant to their expected future and tend not to see that which is emotionally difficult to accept or challenging to their worldview or status quo. Shell’s reaction to this was to provide ways to open people’s eyes and minds to consider possible futures. This was the beginning of scenario planning at Shell.

David Ingvar’s concept of “mental time paths” is discussed in the context of creating imaginative possible futures which people are then asked to consider, the objective being to increase the number of possible futures that they have “experience” of, thus extending their capacity to perceive and accept new ideas. This was not an attempt to forecast the future, but to force people to confront “what if” questions. There was always more than one scenario and they were deliberately designed to be disturbing and challenging to the accepted status quo.

The scenarios were designed to challenge people’s comfort levels and expectations in a non‐threatening manner. As a “symbolic story” of a possible, but not predicted future was used, people could react with honesty and openness and address issues usually un‐talked about – in addition no one needed to shoot the messenger as he did not threaten their position.

Scenario planning was judged to be a great success in developing shared mental models and collaborative learning. Group decision making was enhanced and judged to be happening two to three times quicker than before. Shell was able to make decisions in advance of crisis and avoid being forced to make hard and expensive decisions through a lack of time to react. It was a pre‐emptive strategy managers were encouraged to act on signals perceived, not wait for the pain to begin.

Companies forced to respond to crisis typically react by cutting costs – primarily people. However it was Shell’s position that people were the true assets of the organisation, the critical factor of production. People had replaced capital as the scarce resource, but not simple labor, rather the knowledge worker, those able to create new ideas and adapt to new circumstances. Thus Shell’s strategy became one of encouraging knowledge creation and sharing, team learning and development.

Cohesion of identity is the second shared characteristic of long living companies. The people, teams and company shared common values, beliefs and purposes. This did not come about automatically, but rather, was carefully nurtured. Shell adopted the philosophy that people were willful, that they would naturally seek to fulfill their own purposes and personal development and that they were part of a “Unitas multiplex”: a system composing the individuals, teams, groups, divisions and companies within Shell, each of which was seeking to survive and fulfill its potential.

Whereas the majority of companies had traditionally sought profit, long living companies seek life. The metaphors De Geus uses are those of the puddle and the river. An economic organisation is focused on profit, it is a money machine that has a contract with its employees, they exchange labor for money. If demand is down, people are cut to save costs. Economic, “puddle” companies tend to be product focused and vulnerable to environmental change, puddles have little tolerance for heat (change).

In contrast a “river” company has the purpose of self‐preservation; although its physical form may change over time, it is open to new members and new ideas, as it is always changing. It pursues learning as the way to self‐knowledge and encourages the diversity that inspires innovation. The question Shell sought to answer was not how to control, but how to provide structures to channel this creative energy.

Managers constantly face the age‐old dilemma of “freedom or control” and tend to see‐saw back and forwards as business changes. In times of threat or change, control tends to be re‐asserted by the center. The primary fear once again is that of the unknown. Shell very deliberately set out to maximise the fringes, to provide space for exploration and to encourage innovation. There was a deliberate attempt to reduce fear and remove punishment mechanisms.

De Geus uses the term “flocking” to describe how innovation was encouraged and cohesion developed. There was the belief that groups learnt faster than individuals and there was a consequent focus on collaborative and group training. People were brought together from around the Shell world and social propagation of the ideas learnt was encouraged. Mobility was emphasised, of both people and groups. These diverse groups bought together radically different world‐views and ideas, but what they jointly developed was propagated throughout the organisation. Greater diversity led to greater corporate cohesion and group identity as learning and experiences were shared. As much as possible decision making was pushed out into teams to increase the “brain‐power” focusing on any solution.

Diverse group learning led to tremendous tolerance of differences, but in the case of the living company, tolerance has a much wider meaning. Environmental tolerance is the ability of a company to withstand changes in its environment. Organisations that exercise high degrees of centralised control typically have low tolerance to change and turbulence in the environment. In many cases – nationalised industries, monopolies, industries protected from foreign competition – this is not critical. However for companies operating in open, competitive markets, the development of “space” for innovation and diversity is critical to its adaptability and thus survival.

Shell again found scenario planning to be very powerful as it institutionalised a process whereby diversity was exploited to encourage innovation and shared learning; this spread throughout the organisation and built cohesion as groups daily tested and developed their values and purpose alongside that of other groups and the organisation.

With the trust and shared knowledge that developed over time with this process there began a conscious process to distribute power under the two principles that no one should have too much power and that the more people involved in decision making, the better the decision. This latter point certainly seems contrary to common sense, however the combination of scenario planning which had given people the memories of the future, and the support structures that encouraged people to risk speaking up and making mistakes, encouraged effective group decision making. This was especially so as people became aware that their own wellbeing was intimately connected with that of the group and the organisation.

Long living companies were seen to be frugal, preferring the flexibility afforded by cash in the bank and to evolve steadily over time, rather than by rapid expansion or acquisition. This makes considerable sense as when the figures are examined, 60‐75 per cent of the mergers in the 1970s and 1980s failed as “corporate immune systems” cut in. Quite simply, companies, like all living systems, are conditioned to reject foreign bodies. Financial conservatism was seen as a “governor” on the organisation, ensuring continuous, steady growth.

In contrast to this frugality, and perhaps a surprise to most readers, living companies are not only better places to work, but they typically return 15 times better shareholder value over the long run than the economic companies that focus on short term profit.

However, let us perform a reality check. If Shell was such a wonderful place to work, why have we not heard so much about it before? Why did Tom Peters not hold it up as a shining example? Why is it not discussed today as an example of successful knowledge creation and sharing? Having been part of a family that worked for Shell, some interesting observations can be made. Shell had tremendous persona. It did hold a personality and character all of its own and its employees, their families and the affected population in general were aware of that. Does that alone make Shell self‐conscious? I do not think so. As for accelerated learning, yes that was certainly a major focus of which everyone was aware, likewise scenario planning did seem to impact almost everyone in the organisation. But working for Shell was certainly not as ideal as portrayed in The Living Company; interpersonal and power conflicts were as real as in any other organisation.

So let us assume that Shell was a genuine “living organisation” and like any living entity, less than perfect “around the edges”, in a constant state of change, open to its environment continuously acting and re‐acting, learning and adapting.

My first observation is that while simplifying the problems of actually “living the living company”, makes for easier writing, the author has perhaps done his readers, especially those he converts to the cause, a disservice by making it sound relatively simple and painless. The process undertaken at Shell was decades long, and is presumably still going on; living organisations do not spring fully formed, but require careful nurturing and loving attention. It could be argued that the living company text is in effect creating a “memory of the future”, fulfilling the role of scenario planning, opening people’s minds to possibilities previously un‐imagined.

The obvious conclusion is that any movement to the philosophy of the living company will take time; it will be evolutionary rather than revolutionary. This is congruent with the philosophy and also essential to allow people the time to explore, adjust and open themselves to new ideas and relationships. If the main premises of The Living Company are correct, then we can all look forward to a working future considerably more challenging than we are used to. But it will also be considerably more rewarding.