Using the Graham-Leviss article and Burgelman Working Paper as a starting point, what do you feel are the top three attributes of a leader who can successfully and strate

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Built to Become: Corporate Longevity and Strategic Leadership*

© Robert A. Burgelman Stanford University

Working Paper Series #3115 (Revised March 2015)

*This paper forms the conceptual foundation for the introductory chapter of a book manuscript titled: Built to Become, co-authored with Philip E. Meza and H. Webb McKinney. I thank Philip and Webb for checking facts and helpful edits on early versions.

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A Thought Experiment

Suppose Bill Hewlett and Dave Packard came back from the Elysian fields today and

visited the corporation that bears their names. Would they recognize it? Would they be

happy about how HP has evolved and what it has become since their departures? Why

does it matter how they would react? Such is the level of respect for Packard’s and

Hewlett’s leadership and accomplishments in Silicon Valley and the wider world that the

two men’s legacies are still reflexively invoked to measure any change at HP.

Chances are that the founderswould hardly recognize the company today. For one thing,

gone are the original core Test and Measurement (T&M) businesses – the direct

descendants of the products the two engineer-entrepreneurs developed and manufactured

in that famed garage. Those assets were taken by a public company called Agilent that

spun off from HP in 1999, and some were to be spun off again in 2014 (in particular, the

core Test and Measurement business that the founders started in the garage so that

Agilent can focus on Life Sciences). Remembering GE’s old “Jack Welch rule” of

keeping in the corporate portfolio businesses that are #1 or #2 in their industry segments,

Hewlett and Packard might ask why HP’s corporate management did not continue to

capitalize on these leading-edge technology-based T&M businesses that dominated their

segments and ended up generating far greater return on investment than most of HP’s

other businesses.1 The founders likely would not be impressed by HP’s gigantic size

today and they would almost certainly be disappointed to find that the company HP is

now positioned in mostly commodity-type businesses.

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Poignantly, it is easy to imagine the founders one more time attempting to get a feel for

the culture of the current HP “by walking around,” as they did regularly at HP plants and

offices all over the world. They would probably be sorely disappointed at finding that

transaction-oriented values, imported from acquisitions and leaders from outside of HP,

have largely replaced the relationship and innovation-oriented values of the old HP Way,

and that the old culture of solidarity-and-meritocracy they built over decades has too

often given way to opportunism-and-careerism. Hewlett and Packard would surely

wonder what they could have done differently to preserve more of their values at the

company they created. Flipping through HP’s annual reports and news clippings, they

might think about the kind of boards of directors they assembled and the impact these had

on the company and its culture after they had gone; and the two men would wonder about

the impact that going outside the company for CEO leadership four times in a row had on

the legacy they probably believed they had cemented into the foundation at HP.

And yet, hard-headed businessmen and solid engineers that they were, they also would be

impressed that HP is still around as an independent company. Moreover, they would be

gratified that while HP—like many very large companies—is struggling to get back to

growth, it is profitable; that it still attracts excellent people; that it still has a bedrock of

very strong technological competence and human capital and that it still evokes in many

in Silicon Valley the feeling that HP has the potential to continue to be a great company.

The founders would probably admit to themselves and to each other that it does not really

matter what they think and feel about the company that was once theirs. What really

matters is that HP’s longevity be preserved so that it can continue to offer employees

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highly-valued jobs and be a source of innovation and contribution that makes the country

and the world a better place. Rooted in science and engineering as their thinking always

had been, they would probably return to the Elysian fields with fresh questions about the

forces that drive the evolution of long-lived companies, shape them in ways not

anticipatable by their founders, and about new ways to think about what makes such

companies great.

Inspired by the idea of Hewlett and Packard returning to visit their beloved HP, this book

addresses several questions that they probably would take back with them: Why do some

companies survive over long periods of time while others do not? What makes some

long-living companies great, and what does “great” actually mean? What is the role of

strategy and culture in helping a company live for many decades over the tenures of

multiple CEOs? How do long-lived companies balance their strategic resource allocation

between exploiting existing business opportunities and creating new ones? What is the

role of the board of directors in helping top management secure the future of the

company? These are questions for which executives (and business school professors) are

always looking for better answers.

Corporate Longevity and Greatness

Few companies survive as independent entities for very long periods of time. Of the top

100 US-based industrial companies listed in Fortune magazine in 1983, the year HP first

cracked into that elite group, only 21of those companies remained in the top 100 in 2013,

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the rest having been acquired, dropping in relative size or going out of business. But not

HP, it continued to rise. This is shown in Figure 1.1.

_______________ Figure 1.1 About Here

_______________

The rapid turnover in the Fortune 100 list shows the highly dynamic external

environments that most large corporations face. It is a tough world out there, especially

for tech companies. This dynamism results from industry players, sometimes incumbents

but more often upstart new entrants, changing the rules of the game. Whether implicit or

explicit, these rules of the game usually remain unchallenged for extended periods of

time, giving leading companies enough room to get comfortable and set in their strategies

until their worlds are turned upside down2

The rapid turnover in the Fortune 100 shows how short life can be for even very large

companies. Contrast this with religious, political and educational institutions, which often

are imbued with time-transcending values, and sustained by the faithful efforts of

successive generations of members who want them to continue to exist, for rational and

emotional reasons, beyond their stewards’ own lifespans. This is also true in many

family-owned companies.3 Corporate longevity for its own sake, however, can feel out of

step in publicly-owned companies that exclusively focus on maximizing share price,

particularly in our time of global competitive dynamics, transient corporate relationships

and purely transaction-motivated interactions between employers and employees that

leave no place for loyalty.4

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If longevity is hard to achieve; what about enduring corporate greatness? The best-selling

book, “Good to Great”5 defined “great” companies as those 11 that for a period of 15

years after a major transition were able to achieve average cumulative stock returns at

least 3 times those of the overall stock market. The book concluded that such enduring

greatness depends on a certain type of leadership style. Alas, corporate greatness appears

to be even more fleeting than corporate longevity. By 2007, only 3 of the 11 great

companies profiled in “Good to Great” remained “great”, with the 8 others either no

longer existing as independent institutions or now performing at levels below greatness.6

This seems consistent with the fact that some companies get lucky for an extended period

of time.7 But even companies that are identifiable as great through the statistical analysis

of sustained superior performance 8 still face the question whether their success is based

on superior capabilities or on benefiting from a process of cumulative advantage (e.g.,

increasing returns to adoption, or network effects, that create non-linear winner-take-all

strategic dynamics).9

Of course, all of this raises the question of what “greatness” really means. In the end,

greatness is unavoidably subjective since the objective measures used to demonstrate it

are a matter of choice. Corporate greatness should perhaps always be considered in terms

of performance measured against the best relevant competitors along multiple

dimensions, such as stock performance, market share, profitability, customer and

employee satisfaction and the like. A company only lives long enough to become great if

it continues to be able to satisfy its customers to generate the resources necessary for

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staying afloat, and can only remain independent if the majority of its shareholders want it

that way.

Also, company greatness is somewhat similar to company size; that is, it is basically a

static measure that is determined at a particular moment in time and is ephemeral because

in the next moment, as the data suggests, any given company can (and usually will) fall

from greatness. It may therefore be more useful to view company greatness, like

company size, as the by-product of a dynamic process. Company size, for instance, can

be viewed as the by-product at any moment in time of the company’s growth process.10

Similarly, corporate greatness can be viewed as the by-product of a company’s continued

strategic efforts to remain – in the words of Microsoft’s CEO Satya Nadella – relevant11

— to customers, investors and others. Remaining relevant is a necessary condition for

corporate longevity. With this in mind, greatness, admittedly subjectively, is re-defined

in this book as a company’s capacity to transform itself significantly throughout its

lifetime so as to remain relevant to its shareholders and thereby maintain its

independence.

A Typology of Company Founding

Company-building efforts can be characterized in terms of two dimensions. The first

dimension concerns the founders’ purpose: whether the venture’s purpose is short-term

instrumental (primarily serving the financial objectives of the founders and early

employees) or long-term institutional (primarily geared toward building a long-living

company). The second dimension concerns adaptive capability: whether the venture

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relatively quickly succumbs to the pressures of the external environment or is able to stay

ahead of these pressures (stays relevant!) and survives for the long term. This is shown

in Figure 1.2.

________________ Figure 1.2 About here ________________

Figure 1.2 shows four generic types of company building efforts. Failing companies are

ventures that serve an instrumental purpose but have low adaptive capability. The vast

majority of start-up companies, unfortunately, fall into this category. Short-lived

companies are built-for-exit ventures that serve an instrumental purpose but have

sufficiently high adaptive capability that they can survive long enough to secure a

successful exit for the founders and investors. A fairly recent example is Instagram, a

start-up company with 13 employees, that was sold to Facebook in 2011 for $1 billion.12

Live-to-be-acquired companies originate with an institution-building purpose but over

time lose the adaptive capability necessary to sustain their independence in the long run

and eventually get acquired (or fail and disband). HP’s acquisition of Compaq in 2002

remains a major example. Long-lived companies originate from an institution-building

purpose and are able to continue to develop the adaptive capability necessary to sustain

themselves as independent economic institutions for the long term, sometimes hundreds

of years.13 These long-lived companies are able to transform themselves multiple times

to weather the turbulence of environmental change and often absorb some of the built-

for-exit ventures and live-to-be-acquired companies, which add diversity and growth

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opportunities and increase their ability to survive. They are the companies that are

characterized further down in this chapter as “built-to-become.”14

This book focuses on HP as a built-to-become company; one that was able to acquire

other major companies such as Compaq and EDS. Compaq itself had been able

previously to absorb live-to-be-acquired companies such as Tandem Computers and

DEC. It also views HP as a “great” company because it has so far been able to transform

at least five times (some say six times15) in the course of its 75-year history and is

currently working through a sixth major transformation. The chapters that follow will

examine how HP and its successive CEOs have been able to sustain the company’s

longevity and greatness.

Context Dynamics and Corporate Becoming

Looking at a company’s history involves understanding the continuities, contingencies,

and changes in context – the context dynamics – that the company faces over time.

Continuities are patterns that extend for a long time; by contrast, contingencies are

events that do not form a pattern.16 External continuities (e.g., technological forces;

regulatory laws) as well as internal ones (e.g., the imprint of founders’ values and

approaches beyond their own tenures; the unresolved issues and challenges left to a

successor CEO by his or her predecessor) extend beyond the tenure of any CEO in the

evolution of the firm. Contingencies – unexpected good luck or bad luck events –

unavoidably confront CEOs during their tenures.

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Context is formed by the set of changing external and internal forces within which

strategic leadership must operate. Context does not cause events but determines its

consequences; for instance, slipping on a path in a flat field may result in a strained ankle

or broken leg, but slipping on a path along a hundred-foot cliff may result in death.17 As

the statesman and historian Henry Kissinger has insightfully observed:

Leaders cannot create the context in which they operate. Their distinctive contribution consists in operating at the limit of what the given situation permits. If they exceed these limits, they crash; if they fall short of what is necessary, their policies stagnate. If they build soundly, they may create a new set of relationships that sustains itself over a historical period because all parties consider it in their own interest.18

Kissinger’s view about context could be interpreted to imply that leaders must always

take the context as unalterably given, but this would of course be too limited an

interpretation.19 Also, leaders must be able to simultaneously take into account and deal

with both the internal and external dimensions of context. Once a leader takes strategic

actions that change the context, however, the consequences, as is widely understood,

usually cannot be fully anticipated.20

One important implication of the importance of context is that strategic leadership must

be able to operate in unstructured, or at best ill-structured, situations.21 The corporate

environment is messy: key executives often undertake strategic actions that may not be

well aligned; a company’s most threatening competitor may not be apparent in advance;

the players in any industry can make a multitude of strategic moves; and the results of

competitive interaction between industry competitors are not always predictable. The

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functioning of the strategic leadership in large, complex organizations is therefore likely

to be relatively untidy, and difficult to capture in relatively simple analytical models.

Changes in internal and external context make useful milestones for studying the

role of strategic leadership in the evolution of a company over time. The changes

can be subtle and hard to perceive as they occur or they can be clankingly

obvious. They are usually caused by changes to the “rules of the game” that

govern the context in which firms operate. There are several different types of

rules that shape the context dynamics over time.

Normative rules are based on law, cultural norms, ethics, and administrative

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