What It Means for Companies to Act Their Age.
By Aswath Damodaran
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.
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.
Read the full MIT Sloan Management Review article.
___
Aswath Damodaran holds the Kerschner Family Chair in Finance Education and is Professor of Finance at New York University Stern School of Business.