Chapter 19. Building Organizational Fitness

Michael Beer

The 21st century promises to be characterized by rapid change in technology and relentless competition spurred by globalization. It is hardly news that in this environment firms will have to possess the capacity to adapt or suffer the consequences—low performance and ultimately death and destruction.

Unfortunately, firms do not seem to be adaptive. Consider these startling findings by Foster and Kaplan regarding the survival rate and performance of U.S. firms.^[1] Of those firms in the original “Forbes 100” list published in 1917, 61 ceased to exist by 1987. Of the remaining 39, only 18 stayed in the top 100. These firms (which included Kodak, DuPont, General Electric, Ford, General Motors, Procter & Gamble) survived momentous events such as the Great Depression and World War II, but, with the exception of General Electric and Kodak, underperformed the overall market by 20%. Recently, Kodak's performance has suffered as it struggles to respond to challenges by foreign competitors. Similarly, of 500 companies in Standard & Poor's original S&P 500 list in 1957, only 74 remained on the list in 1997 and of these only 12 outperformed the S&P 500. In a Darwinian economic environment, unfit organizations—those that do not adapt to fit new circumstances—do not survive.

Failure to perform not only hurts investors. There are human costs involved in all these corporate failures. Employees of Polaroid Corporation, a firm that had been failing for years and declared bankruptcy in 2001, found that out recently.^[2] Not only did they lose their jobs and attachment to an organization about which they cared deeply, promised and critical healthcare and retirement benefits have disappeared. Leaders themselves are hurt by their inability to change their organizations and their leadership behavior. CEO tenure has declined from 10.5 years in 1990 to 4.2 years in 2000. Leaving a proud legacy, something most CEOs strive for, is much harder in a business environment that demands rapid change.

It seems quite clear that a wide array of firms do not possess the capacity to learn and change, what I call organizational fitness. Nor do their leaders possess the capacity to develop this capability. What organizational and leadership characteristics reduce organizational fitness? More importantly, what can be done to build organizational fitness? I will describe an approach to building organizational fitness, called Organizational Fitness Profiling (OFP), that has its roots in the work of Richard Beckhard, to whom this book is dedicated. Research into the application of OFP at the corporate and business unit level has revealed that senior managers must embrace a number of paradoxes if they are to ensure high performance and survival of their institutions and reputation.