What It Means for Companies to Act Their Age

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Every business experiences a life cycle, transitioning from a startup through growth and maturity, and eventually decline. While no leader wants to see their business in decline, the best response to aging as a business is to accept that it’s happening and run the company to reflect its age. There are several factors that induce companies to fight aging, sometimes with success. Some are rooted in psychology: Shrinking a business is typically perceived as a failure, while growing one is considered a success. Others stem from management incentives, where there is a potential upside for managers who risk it all on low-odds, high-payoff bets made with other people’s money.

Renewals, Revamps, and Rebirths

Before a company reaches the point where it must accept its maturity or decline, it may attempt to fight aging. There are three ways leaders can reverse the aging process: renewals, where they try to fix the existing business to make it grow again; revamps, where they extend into new markets and new products; and rebirths, where they change the business, hoping to restart the corporate aging clock.

In a renewal, a company can take actions ranging from the cosmetic to the more tangible. These can include a corporate name change to reflect expanded product offerings, such as when Boston Chicken changed its name to Boston Market to reflect its diversified product mix; or a rebranding, like when Philip Morris Companies changed its name to Altria in an attempt to distance itself from its association with cancer-causing tobacco products. These can be strategic makeovers, in which companies facing a low-growth future present a shift in focus to investors and consumers. They can also include efforts at remarketing and rebranding existing products, as Abercrombie & Fitch did in changing from an outdoor brand to a destination for young mall shoppers in the 1990s. Alternatively, their actions can involve redesigning products and services to make them appealing to different customer bases.

Most companies that face slowing growth map out renewal plans, and while some succeed, many end up with little to show for the millions or billions of dollars they’ve spent on them. Renewal efforts tend to be successful when change is real rather than merely cosmetic, based on operating changes that add value. Renewal plans can fail when an entire sector, rather than just an individual company, is struggling. In these cases, renewal plans can end up being too similar across companies in the sector to prove effective. Success is more likely if you have plans that are original and build on strengths that are unique to your company. Finally, some renewal efforts can alienate existing customers as new ones are being pursued, creating net negative effects for the company.

Revamps require more change and are more costly than renewals, but they can have bigger positive payoffs if they work. Examples include expanding product or service offerings, expanding to new geographies, or shifting to new business models. The New York Times’ expansion of digital offerings is one example of a successful revamp, as is Adobe’s switch to a subscription model. A mistake that many companies make in identifying targets for growth is that they pay too much attention to the size of the market and far too little to what unique strengths they possess that will allow them to capture a tangible share of the targeted market. That’s a lesson worth remembering as artificial intelligence becomes the big buzzword of the moment and every company claims to be developing a pathway to making money in that space.

In a rebirth, a company remakes itself as a new business, perhaps very different from its original one. There are companies that have beaten the odds of the business life cycle, fought off decline, and been reborn as successful ventures. Two examples come to mind: IBM fell from glory as a maker of personal computers in the 1980s and was subsequently reborn as a healthy, profitable computing services and research firm in the 1990s; and Apple, after the dark days of 1997, when it lost market share in personal computers, climbed back to the top of the market capitalization table in 2012, riding the success of the iPhone. These companies are the exceptions rather than the rule. Some factors that led to their successful rebirths were an acceptance that the old ways no longer worked; change agents at the helm, in IBM’s Lou Gerstner and Apple’s Steve Jobs; a plan for change that built on each company’s strengths; a willingness to shake up or cannibalize existing businesses; and a healthy dose of luck.

When renewals, revamps, and rebirths have been tried to limited success, or if none of these is a viable strategy for a company, it should accept that it has aged into a phase of late maturity or decline. If a company accepts aging, its managers will adjust investment, financing, and dividend decisions to reflect its age — even if it means low, no, or even negative growth for the business and, perhaps, leads to its demise. Growth for the sake of growth, and survival for the sake of survival, is not a good end game for any business.

The Acceptance Playbook

For a company to age gracefully, its management must start by accepting its age and redefining what success and failure will look like. The top management and CEO of a mature or declining company must bring in a very different mindset about business — one that is less ambitious than that of the top management or CEO of a company earlier in its life cycle. If you have a management team that recognizes where the company is in the life cycle, this is how the rest of the playbook unfolds:

1. A narrative that fits: An accepting management team will tell a corporate story that reflects where the company is in the life cycle. With a mature business, that story will be one of low growth, perhaps with optimistic takes on margins and returns; with a declining business, it will be one where the company reduces its asset base and becomes smaller in response to a shrinking market.
2. Consistency in investing policy: The mature company management team that tells a “mature business story” will be credible only if it steers away from making big acquisitions or investing in new businesses.
3. Consistency in financing and cash return: As companies age, they need to transition their financing and dividend policy from no debt in the early stages to more debt in maturing, and from being dependent on cash inflows from equity when young to offering large dividends and buybacks in maturity.
4. Investors who buy into that narrative: When companies are at peace with where they are in the life cycle, they will tend to attract investors who are like-minded, making it easier to maintain policies that make sense. These companies will repel investors whose preferences don’t match what they can deliver, given where they are in the life cycle, even if it means lower share prices in the near term. Companies that seek out investors who want what they cannot deliver — often because these investors have capital — are setting themselves up for failure and friction.

Acceptance of where a business is in the life cycle makes managing it simpler and less error-prone. But for many companies, that acceptance remains elusive as their managers craft plans and act in ways that are out of sync with where they are in the cycle. This disconnect occurs for many reasons: boredom, hope, management incentives, or peer-group pressure. What’s more, management consultants and bankers generate a large portion of their fees from their capacity to convince companies that they can reverse the aging process and by getting them to act on that belief.

It’s a testimonial to the forces that are arrayed against acceptance that there are so few examples of companies that have adapted to the mature or declining phases of the life cycle and made decisions accordingly. Even in sectors where there is clear and incontrovertible evidence of business decline, individual companies aspire for growth, though it might never manifest. One example of a company that countered this trend is Severstal, a Russian steel company, which responded to a collapse in profitability in the global steel business by divesting a large chunk of its non-Russian holdings between 2011 and 2016 to become a smaller, albeit more profitable, business.

For most companies, acceptance comes only after they’ve tried more ambitious plans to reclaim growth and reverse aging. An example of how much it takes for management to arrive at acceptance is General Electric, a company with a storied past and a history of success coming into the 21st century. For much of this century, the company has struggled to make its multiple businesses, spread across geographies, succeed. In 2001, Jeff Immelt took the reins of GE from his legendary predecessor, Jack Welch, who had been largely responsible for building the corporate behemoth. Immelt felt the pressure not only to keep the company intact but to continue the path of acquisitions and growth that Welch had forged. By 2017, when he stepped down as CEO, it was clear that GE was heading for a cliff, but it took two more years of operating pain before the company announced plans to break itself up and become a smaller business.

If companies are mature or declining, run by managers with little skin in the game, and face little pressure from investors to change their ways, it’s very likely that those companies will refuse to act their age.

Making Your Choice

As a manager of a business, you must play the hand you’ve been dealt, not the one that you wish you had. If you’re lucky enough to be at the helm of a high-growth business with strong competitive advantages and a growing market, you clearly will have an easier time delivering operating success than if you were running a company in decline, with few competitive advantages left and debt weighing you down. At the same time, financial markets will expect much more from a company that’s growing strongly than one that’s in decline, so managers of a declining business may have an easier time meeting investor expectations.

In the late stages of the mature phase, or at the precipice of decline, companies face a choice. For most of them, the choice that both offers the best odds and requires the fewest contortions is acceptance, wherein managers adapt to being at the helm of a mature or declining business and act accordingly. Many of them, though, will look for alternate pathways designed to either stop aging or, better still, reverse it. While the odds of success are low, businesses that build on their strengths in their renewal, revamp, or rebirth attempts have a greater likelihood of success.