Why some companies survive for centuries Monday, 6 November 2017
Pakhuismeesteren in 1875 and modern-day Vopak (photos by Vopak)
This article appeared earlier in RSM Discovery Magazine 31
The paper company Stora Enso dates back to the 13th century. Canada’s Hudson Bay Company was founded in 1670, and Dutch textile manufacturer Royal Ten Cate was founded in 1704. All of these firms are still in existence. By comparison, according to recent figures, the average lifespan of Standard & Poor 500 firms is just 18 years. How can some companies last for centuries, while many of today’s largest companies might not live to see their third decade?
In a Business History journal article entitled, “A co-evolutionary analysis of longevity: Pakhoed and its predecessors”, a team of researchers from Rotterdam School of Management, led by Dr Hugo van Driel and Professor Henk Volberda, explored this question through an in-depth case study of Rotterdam-based warehousing and tank storage company Pakhoed.
As explained by the authors, there are two dominant theories or perspectives related to firm longevity. One perspective credits longevity to organisational characteristics; the other focuses more on environmental forces. Thus, the authors explain, some argue that a company survives because the managers of the company are able to adapt to environmental forces; others argue that corporate structure and core competencies are more-or-less fixed, and that environmental forces are the principal drivers of long-term company survival.
According to the authors, both of those perspectives add value to the discussion but are not, by themselves, sufficient to explain how a firm like Pakhoed stays alive. A better theory of longevity, they write, is a co-evolutionary theory in which both the company and its environment evolve over time. As the team writes, ‘An organisation that is optimally equipped for long-term survival is likely to be one that is adaptive and that maintains a dynamic fit with its changing environment.’
This co-evolution between a company and its business environment over time is, the authors believe, the key to achieving a balance between exploitation and exploration, which is the fundamental requirement for long-term survival. Exploitation is focused on ‘the current range of activities,’ they write, and involves such initiatives as expanding existing markets, improving existing competencies and seeking efficiency gains. Exploration, on the other hand, involves experimentation and risk. Exploration activities, the authors say, ‘create new paths or alter existing paths, and are radical and discontinuous.’
In their article, the authors focus on the three firm-level characteristics that along with environmental forces ‘determine the balance between exploitation and exploration and thus the longevity of forces.’ These three characteristics are:
- A strong sense of identity.
- A tolerant management style and decentralised structure.
- A conservative financial policy.
As the authors explain, ‘While a tolerant management style and decentralised structure will induce exploration, a strong sense of identity will guide and channel innovation and ensure that exploitation activity is not infringed upon too much. In addition, financial conservatism both serves as a buffer in bad times and provides the slack needed for exploration.’
Lessons from the Netherlands
In a recent interview, assistant professor van Driel explored in greater depth these three organizational characteristics, basing his comments on the case study at the heart of the Business History article: the story of Rotterdam-based tank storage company Pakhoed.
As described in the article, the roots of Pakhoed are found in three companies: two Amsterdam-based co-operative transport and warehousing companies, founded about 1600, called Blaauwhoedenveem and Vriesseveem; and a Rotterdam-based warehousing company called Pakhuismeesteren van de Thee founded in 1818, whose name was shortened to Pakhuismeesteren in 1850. In 1917, Blaauwhoedenveem and Vriesseveem merged into a company eventually called Blaauwhoed. In 1967, Pakhuismeesteren and Blaauwhoed merged to form Pakhoed. Although Pakhoed itself merged with Rotterdam-based Van Ommeren to form the world’s largest independent tank storage company in 1999, the new company – called Vopak – is a clear continuation of Pakhoed.
Strong sense of identity
A strong sense of identity is one of the clearest factors related to longevity, according to van Driel. Both Pakhuismeesteren and Blaauwhoed draw their strong sense of identity from their long histories.
For nearly two centuries starting in 1600, the firm’s original companies, Blaauwhoedenveem and Vriesseveem, were part of a small group of co-operatives (in Dutch veem with plural vemen) with a near-monopoly on the local transport of general goods. In the mid-1800s, the two companies were part of an even smaller group of co-operatives given the newly outsourced warehousing work from the Dutch Trading Company.
The origins of Pakhuismeesteren are found in the warehousing masters of the Dutch East Indies Company (VOC), which existed from 1602 to 1799. Thus, it seemed that by operating in the old warehouses of the VOC, Pakhuismeesteren in Rotterdam was simply continuing the legacy of the VOC. But most important was the fact that the warehouses were in limited supply; by taking over the VOC warehouse, Pakhuismeesteren benefitted from owning the scarce resources on which they could build their warehousing business.
In sum, says van Driel, ‘the co-operative identity of the vemen was very strong, and for Pakhuismeesteren it was the same: serving the customer and being a credited warehousing company gave them a strong identity. And in Pakhuismeesteren, we have the additional factor of being a family firm.”
Van Driel notes that a strong sense of identity does not mean that identity has to remain completely fixed during the entire history of the company. In the 1860s, Pakhuismeesteren responded to the new petroleum industry with a crucial move: it diversified into oil storage. This oil was first stored in barrels and from 1887 in tanks. In retrospect, this was a turning point in the survival of the firm.
One of the reasons that Pakhuismeesteren was successful is that it moved immediately into the business, thus acquiring precious tank storage capacity in the port. ‘The scarcity of tank terminal capacity in Rotterdam has been a major factor in the success of Pakhoed and its forerunners,’ van Driel says.
About a century later, Blaauwhoed would also somewhat change its core identity. In the 1950s, Blaauwhoed started converting many of its warehouses into real estate developments – a response to a falling warehousing business and a booming real estate market, especially for industrial conversions. About the same time, the company changed its name from Blaauwhoedenveem-Vriesseveem, as the company had been known since the 1917 merger, to Blaauwhoed. ‘We see that the sense of identity becomes weaker,’ van Driel says, ‘because they removed the suffix veem from the name of the company, which, from a symbolical point of view, was very important.’ The clear message was that warehousing was no longer the focus of the company.
Financial conservatism, van Driel says, includes maintaining a low debt and keeping as much money in the firm as opposed to paying it out – ‘although,’ he adds, ‘it depends a bit on what happens with the money after it has been paid out.’ For example, he says, ‘In some sense, the vemen had a high payout, because 100 per cent of the profit was paid out as part of the co-operative system.’ However, the individual members of the co-operative were also responsible for any risks or losses. As van Driel explains, ‘there was no money borrowed, no debt for the company. If the company needed money, the members were more or less obliged to supply it. So, the chance of going bankrupt was very low.’
Likewise, the family owners of Pakhuismeesteren also tended to keep money in the firm. ‘If you look at the Pakhuismeesteren, they had a high payout in the 19th century, formally, but they left the money in a company on a separate account,’ van Driel says. ‘So, that would qualify for me also as a low payout.’
Open management style
An open, tolerant management style and decentralised structure is also vital to longevity, says van Driel, and the history of both sides of Pakhoed, in different ways, has reflected this openness. ‘When you look at the vemen, the oldest forerunners of the warehouse companies, their openness is derived from the fact that they were co-operatives, and that they had an egalitarian structure,’ van Driel says.
The origins of the founding of Pakhoed also contributed to its open management style, although for different reasons. As noted in the article, when one of the two VOC warehouse masters died just when Pakhuismeesteren was being formed, the commission agent H.C. Voorhoeve and the Dutch gin manufacturer E.P. de Monchy picked up the torch. However, they also continued with their other businesses, which, says van Driel, was gave them a more decentralised approach to the management of the company.
The research of van Driel and his team makes clear that the key to longevity is that these firm characteristics – sense of identity, financial conservatism, open management style – help to balance the safety of exploitation and the risk of exploration. Achieving this balance is not always easy. After Blaauwhoed merged with Pakhuismeesteren in 1967, the management of the newly formed Pakhoed had three core businesses: tank storage, dry goods transport and storage, and real estate. The dry goods sector never brought Pakhoed substantial returns, real estate was discontinued in 1985, and tank storage became even more the backbone of the company.
However, van Driel says, ‘there was a vague feeling in the Pakhoed management that they needed to have more than one pillar of the company.’ After unsuccessful attempts to find the elusive extra pillar, the company – only in around 2000 – concluded, he says. “Well, we are a tank storage company, and that's it.” But it took several decades of experimentation and learning to come to this insight.’
Based on the article: Hugo van Driel, Henk W. Volberda, Sjoerd Eikelboom & Eline Kamerbeek, A co-evolutionary analysis of longevity: Pakhoed and its predecessors, Business History, Vol. 57, Iss. 8, 2015, Pages 1277-1305. Published online 27 May 2015.
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