Levels of corporate development

Abstract

Those who teach and base a significant part of their teaching on their professional practice are continually challenged to find patterns in their experience. The extraction of patterns from, and their imposition on, experience illuminate it and make what ones learns from it more transmittable and comprehensible. What follows is the result of such a "patternizing" effort, one engaged in jointly with my friend Jim Rinehart, then CEO of Clark Equipment. Full development is an ideal that can be approached continuously but never attained. To me there appear to be four levels on the road to full corporate development, each defined by a corporation's financial state and each with an associated dominant objective (see Table I). The first and lowest level is characterized by a negative operating cash flow which, if continued, leads to the demise of a corporation. Therefore, the dominant objective at this level is survival, which requires attaining a positive operating cash flow. Corporations at this level of development naturally focus on financial effectiveness, which they try to obtain by disinvestment and cost reduction. They typically cut inventories and expenses, sell or close facilities that are not performing well, and reduce the size of their workforces. At the second level of development a corporation has a positive operating cash flow but a return on capital employed (ROCE) that is less than its cost of capital. Viability, the ability to maintain life, is the corporation's dominant objective and this requires attaining on ROCE at least as great as its cost of capital. Corporations at this level tend to focus on organizational effectiveness. They frequently divest ineffective organizational units and reorganize those that remain in order to improve their returns. These corporations also