Is Survivorship Bias Destroying Your Growth Strategy?

The Silent Killer: How Zombie Firms and Survivorship Bias Are Reshaping Our Economic Landscape

"The real voyage of discovery consists not in seeking new landscapes, but in having new eyes." – Marcel Proust

Survivorship bias, as demonstrated by Abraham Wald during World War II, highlights the importance of focusing on what's missing in our analysis. By reinforcing undamaged areas of returning planes, Wald revealed critical vulnerabilities, teaching us to look beyond the obvious to identify gaps and blind spots. In the picture above, tracking bullet holes on Allied planes that encountered Nazi anti-aircraft fire in WW2, at first, the military wanted to reinforce those areas, because obviously that’s where the ground crews observed the most damage on returning planes. Until Hungarian-born Jewish mathematician Abraham Wald pointed out that this was the damage on the planes that made it home, and the Allies should armor the areas where there are no dots at all, because those are the places where the planes won’t survive when hit. This phenomenon is called ‘’survivorship bias’’, a logic error where you focus on things that survived when you should really be looking at things that didn’t.

The Walking Dead of the Business World

This concept is particularly relevant when examining the phenomenon of zombie firms and their impact on economic growth. Zombie firms, which continue to operate despite being unable to cover their debt servicing costs from current profits, present a significant challenge to achieving equitable, sustainable economic growth.

Zombie firms are companies that continue to operate despite being unable to cover their debt servicing costs with current profits. These firms often survive due to favorable credit conditions, bank forbearance, and weak insolvency frameworks. Key characteristics include low productivity, persistent lack of profitability, high leverage, limited ability to invest in new equipment, products, or processes, and reliance on favorable credit conditions or government support to survive.

Zombie firms are more than just individual companies facing hard times. They represent a systemic issue that affects the entire economic ecosystem. These firms tie up valuable resources – capital, labor, and market share – that could be better utilised by more efficient and innovative companies. They create a "congestion effect," clogging the arteries of economic growth and preventing the natural cycle of creative destruction that drives innovation and progress.

Zombie firms, much like their fictional counterparts, are entities that should have ceased to exist but continue to lumber on. These are companies that can't cover their debt servicing costs from current profits over an extended period. They survive not through innovation or efficiency, but by relying on favourable credit conditions, bank forbearance, and often, government support. The prevalence of these corporate undead is alarming. In the United States, approximately 10-15% of publicly traded firms fall into this category. The United Kingdom fares even worse, with around 20% of companies classified as zombies. The Netherlands, while lacking specific data, likely mirrors the broader European trend of 10-15%. But why should we care about these struggling entities? The answer lies in their far-reaching impact on economic vitality and growth.

The Domino Effect

Zombie firms are more than just individual companies facing hard times. They represent a systemic issue that affects the entire economic ecosystem. These firms tie up valuable resources – capital, labor, and market share – that could be better utilized by more efficient and innovative companies. They create a "congestion effect," clogging the arteries of economic growth and preventing the natural cycle of creative destruction that drives innovation and progress.The implications are stark:

1. Low interest rates: Loose monetary policy has allowed highly-leveraged companies to make repayments that would be unaffordable under normal economic circumstances.

2. Weak insolvency frameworks: Ineffective bankruptcy processes allow unviable firms to continue operating.

3. Bank forbearance: Financial institutions may be reluctant to recognize losses, extending credit to struggling firms.

4. Government support: Well-intentioned but failed policies to support businesses during economic downturns inadvertently prop up unviable firms.

5. Economic uncertainty: Prolonged periods of uncertainty, such as during Brexit negotiations, can lead to reduced investment and expansion plans.

The implications of zombie firms are significant:

1. Reduced productivity growth: Zombie firms are generally less productive than their non-zombie counterparts, dragging down overall economic productivity.

2. Resource misallocation: These firms tie up valuable resources that could be better utilized by more efficient companies.

3. Crowding out effect: The presence of zombie firms can prevent more dynamic and innovative firms from expanding by locking up resources.

4. Depressed market prices: An oversupply of products from zombie firms can make it difficult for more efficient firms to compete.

5. Increased funding costs: Zombie firms can influence funding costs by maintaining demand for credit, which can drive up interest rates or make it more difficult for healthier firms to secure financing.

The Survivorship Bias Trap

Here's where survivorship bias comes into play. When we analyse economic performance or craft growth strategies, there's a natural tendency to focus on successful firms – the survivors. We study their practices, emulate their strategies, and base our policies on their needs. But in doing so, we risk overlooking a significant portion of the economic landscape. This bias has led to several critical mistakes:

• Overestimating overall economic health by focusing on thriving sectors while ignoring struggling ones.
• Misallocating resources to sectors that appear successful but may be propped up by zombie firms.
• Implementing policies that inadvertently support the continued existence of unviable companies.
• Underestimating the challenges faced by healthy firms competing in markets distorted by zombie presence.

To address the challenges posed by zombie firms and foster sustainable economic growth, various stakeholders can take specific actions:

For Business Owners:

1. Focus on smart innovation and innovative growth: Continuously invest in new technologies, ways of working, systems, and processes to improve productivity. This approach should be customer-centric, addressing real societal needs and creating long-term value rather than just short-term profits.

2. Maintain healthy debt levels: Avoid over-leveraging and ensure a sustainable balance between debt and equity. This financial prudence allows for greater flexibility and resilience in changing market conditions.

3. Diversify revenue streams: Reduce reliance on a single product or market to increase resilience. Explore new markets and product lines that align with customer needs and societal trends, creating a more robust and adaptable business model.

4. Invest in human capital: Prioritise employee training and development to boost productivity and adaptability. Foster a culture of continuous learning and innovation, empowering employees to contribute to the company's customer-centric mission.

5. Regularly assess market viability: Be prepared to pivot or exit if the business model becomes unsustainable. This includes constantly evaluating the alignment between your offerings and customer needs, and being willing to make significant changes when necessary.

6. Embrace ethical and sustainable practices: Implement business practices that prioritise long-term sustainability, ethical considerations, and positive societal impact. This means re-evaluating your existing suppliers/ partners and auditors. Consider boutique providers from smaller family owned businesses to reduce the integrity/ ethics traps. This approach can lead to stronger customer loyalty and a more resilient business model.

7. Foster customer relationships: Develop strong, lasting connections with customers to better understand and serve their evolving needs. Use these insights to drive innovation and improve your offerings continually.

8. Collaborate and partner strategically: Seek partnerships and collaborations that can enhance your ability to serve customers and create value. This could include partnerships with other businesses, research institutions, or community organizations.

By focusing on these strategies, business owners can create more resilient, innovative, and customer-centric companies that are less likely to become zombie firms and more likely to contribute positively to economic growth and societal well-being.

For Policy Makers:

1. Strengthen insolvency frameworks: Improve bankruptcy processes to ensure that unviable firms are restructured or exited efficiently.

2. Refine government support programs: Ensure that support is targeted towards viable firms with potential for growth and innovation.

3. Encourage competition: Implement policies that promote market dynamism and reduce barriers to entry for new firms.

4. Invest in education and skills training: Support programs that equip the workforce with skills needed for high-growth industries.

5. Promote research and development: Offer incentives for companies investing in innovation and new technologies.

For Consumers:

1. Support innovative and customer-centric companies: Choose products and services from firms demonstrating sustainable growth, innovation, and a clear focus on customer needs. Support local businesses and high street heroes that contribute to community vitality. Vote more mindfully with your wallets, considering the long-term impact of your purchasing decisions on market competition and economic health.

2. Invest wisely and sustainably: When investing, consider companies with strong fundamentals, growth potential, and a commitment to customer-centric models. Look for firms that demonstrate antifragility - the ability to thrive under volatility and stress - rather than those relying heavily on debt or unsustainable practices.

3. Advocate for pro-competitive and sustainable economic policies: Support policies that promote fair competition, innovation, and sustainable growth in the marketplace. Encourage the enforcement of competition laws that prevent monopolistic practices and foster a diverse, dynamic economic ecosystem.

4. Embrace lifelong learning and adaptability: Continuously update skills to remain competitive in the job market and support overall economic productivity. This adaptability contributes to a more resilient and antifragile workforce, better equipped to navigate economic changes.

5. Encourage sustainable and customer-centric practices: Support companies that prioritize long-term sustainability and customer value over short-term gains. Favor businesses that demonstrate a commitment to ethical practices, environmental responsibility, and genuine customer-centricity in their operations and strategies.

6. Participate in the sharing economy and circular models: Engage in collaborative consumption and support business models that promote resource efficiency, reducing waste and fostering a more sustainable economic system.

7. Provide constructive feedback: Actively engage with companies to help them improve their products, services, and customer experiences. This feedback loop is crucial for driving customer-centric innovation and sustainable growth.

Based on your request, here's a revised conclusion and call to action that focuses on smart growth and innovative growth for professional services, addressing the specific pain point of avoiding becoming a zombie firm:

Conclusion:

The rise of zombie firms and the challenges of survivorship bias underscore the critical need for businesses to embrace smart, innovative growth strategies. As we've explored, customer-centric models, anti-fragile systems, and sustainable practices are key to navigating today's complex economic landscape. The ability to adapt, innovate, and efficiently utilise resources (with people being at the heart of these) is what separates thriving companies from those at risk of stagnation.

At Flowlabs we've spent 25 years with founders grappling with these very issues. This deep understanding of the founder's journey is a key differentiator for us. We've learned that cultivating the founder's mindset for smart growth is crucial for competing against tier 1 companies and achieving profitable growth.

Our experience has shown that the greatest innovations often arise from failure. Consider these notable examples:

- James Dyson created 5,126 failed prototypes before perfecting his vacuum cleaner.

- Apple's Newton, initially a failure, led to the successful development of the iPad.

- Post-it Notes were born from a failed adhesive attempt, becoming a wildly successful product.

- Coca-Cola's introduction of New Coke in 1985 was a major failure, but the backlash led to the return of the original formula, reinforcing brand loyalty.

- Netflix's initial struggles in transitioning from DVD rentals to streaming taught valuable lessons about consumer preferences.

These stories illustrate that the path to success is rarely linear. Smart growth requires resilience, adaptability, and the ability to learn from setbacks. This is not just an organisational capability. It starts with your teams and individuals. Are they future fit, or hitting the wall?

Is your company or professional services firm struggling to achieve sustainable growth in an increasingly competitive market? Are you concerned about becoming a zombie or a zombie firm, or the creator of zombies? Or perhaps trapped in cycles of debt and stagnation?

Our team of experts can help you:

1. Develop proven customer-centric revenue growth models that foster loyalty and drive long-term value (used to develop global best practice value management centres of excellence at Coca Cola, Mars, Unilever, Danone, Carlsberg, et al)

2. Implement anti-fragile leadership tools and systems that thrive in volatile markets

3. Identify and capitalise on hidden growth opportunities using advanced analytics

4. Create sustainable business practices that appeal to both clients and investors

Don't let your firm become another zombie statistic. Contact us today for a confidential chat and discover how to power-up your team to create smart, sustained, innovative growth.

About the Author:?

Andrew Soteriou, Founder & CEO at FlowLabs/ Venture Partner and former co-founder and COO at Fifth P, Europe's leading boutique strategy and revenue growth consultancy based in London. Andrew has served as an Executive Leader at various retail and consumer companies, Strategic Advisor at PWC/Strategy&, Global Revenue Growth Director at UpClear in New York and London, and co-founded various strategy and consumer tech businesses. Andrew is a regular speaker at consumer goods and technology events in the US, Europe, and Africa. Most recently, he was a panel member and keynote speaker at the AI/Big Data and Smart Cities Expo in Europe (Amsterdam)