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THE BIOLOGY OF BUSINESS

THE LIVING COMPANY
Habits for Survival in a Turbulent Business Environment
By Arie de Geus
Harvard Business School 215pp $24.95

Biology is turning up in the strangest places. Just consider Arie de Geus' The Living Company. With a light touch and an interesting variety of examples, de Geus employs biological metaphors in order to analyze corporate management. His provocative stories also draw upon experiences from his nearly 40-year career at Royal Dutch/Shell Group.

Building on research into such long-lived companies as DuPont, South Korea's Sumitomo, and Unilever, de Geus distinguishes between ''economic companies''--which are run as profit machines--and ''living companies''--whose primary purpose is to survive and perpetuate themselves as ongoing communities. To explain the difference, de Geus borrows from evolutionary theory, ecology, cognitive psychology, animal-behavior studies, and even immunology--with examples ranging from titmouse behavior in Britain to potato cultivation in the Andes. Living companies, de Geus concludes, improve their chances of survival by learning and adapting to their environments more quickly than do economic companies.

A second-generation Shell man, de Geus begins by confessing that he long believed that most companies, including his own, would last forever. But he reports that according to most surveys of corporate births and deaths, the average life expectancy of a multinational is 40 to 50 years. One-third of the companies listed in the 1970 Fortune 500 had disappeared by 1993--acquired, merged, or broken to pieces. There are a few exceptions, such as Stora, which began more than 700 years ago as a copper mine in central Sweden, or Sumitomo, which had its origins in a copper-casting shop founded in 1590. But de Geus says the wide gap between most companies' maximum possible life span and the average realization thereof represents huge wasted potential--and devastated work lives and communities.

At Shell, an internal 1983 study of 27 long-lived companies grew out of an attempt to answer a key question: What would happen to Shell after its oil supplies ran out? It found that none of the long-lived companies it studied had allowed themselves to succumb to failure when a key resource was lost. Instead, they displayed a common ability to exploit such crises and turn them into new businesses. De Geus points to Sweden's Stora. In the 15th century, when Stora was just 270 years old, the king of Sweden threatened its independence. Stora responded by organizing into a powerful, militaristic guild. Through the subsequent centuries, it continually shifted its businesses--from copper to forestry to iron smelting, and eventually to paper, wood pulp, and chemicals. De Geus concludes that it survived by reacting rapidly to changes in its environment.

Moreover, de Geus believes, ''companies die because their managers focus on the economic activity of producing goods and services, and they forget that their organizations' true nature is that of a community of humans.'' The Shell study found that the ability to return investment to shareholders seemed to have nothing to do with longevity. Profits were not a predictor or determinant of corporate health, but a symptom of it.

In his role as Shell's head of planning, de Geus began looking for a way to accelerate the company's ability to grasp environmental changes and adapt to them. So he turned to Allan Wilson, a zoologist and biochemist at the University of California at Berkeley. Wilson had developed a theory that species behavior, rather than environmental change alone, was the major driving force behind evolution. To illustrate this idea, Wilson used the example of the titmouse, a common songbird in Britain, which had learned to siphon cream from the milk bottles left outside doors by milkmen. After dairies began putting aluminum seals on the bottles, the birds figured out how to pierce them, then spread their skill from individuals to the species as a whole.

De Geus and Shell concluded that institutional learning requires ''flocking''-- bringing people together so that learning can be disseminated among them. That, in turn, requires an organization that's tolerant, giving employees a certain amount of freedom and space to experiment without fear of reprisal. De Geus tells a story about Chilean potatoes to illustrate the need for tolerance. Peasants in the Andes mountains traditionally grow a wide variety of potatoes. This doesn't yield as big a crop as planting just one type of potato might, but if a natural disaster strikes, at least some of the potato strains are likely to survive. De Geus likens this to Lockheed's ''skunk works,'' where innovators similarly face few demands that they be efficient. Such ''tolerance towards the margin'' is a key survival strategy, de Geus maintains.

At times, the author pushes the metaphor too far. Corporations have immune systems, he argues, that may be threatened by infections. Corporate hosts, for example, can develop either symbiotic or inimical relationships with trade unions. That's reasonable enough, but de Geus goes on to say that ''acquisitions and mergers are infections. That is why the temperature goes up and the corporate body goes into resistance mode.'' Although he cites studies showing high M&A failure rates, de Geus' reasoning is simplistic, since there are instances when such so-called infections end up strengthening the whole. Overall, though, de Geus provides an interesting challenge to basic assumptions about the way companies work.

BY JULIA FLYNN



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PHOTO: Cover, ``The Living Company''


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