Will Your Company Fail - Statistics say YES!!

To be clear I cannot predict a companies success and longevity however there are traits and lessons to be learned from nature to improve its odds

I recently was intrigued by the increase and frequency of companies falling off the S&P Fortune 500 list and what I found was astonishing. Companies are increasing and decreasing in value at an unprecedented rate. In the world of institutions, commercial corporations are newcomers. The concept of companies comprises only 500 years of activity in the Western world, a tiny fraction of the time span of human civilization. In that time, as producers of material wealth, they have had immense success. They have been the major vehicle for sustaining the exploding world population with goods and services that make civilized life possible. In the years ahead, as developing countries expand their standards of living, corporations will be more needed than ever.

However if you look at them in the light of their potential, most commercial corporations exist at a primitive stage of evolution; they develop and exploit only a fraction of their potential. For proof, you need only consider their high mortality rate. The average life expectancy of a multinational corporation, listed S&P Fortune 500 corporation or its equivalent is between 40 and 50 years. A full one-third of the companies listed in the 1970 S&P Fortune 500 had vanished by 1983 with this trend has only increased to 50% in the 10 year period from 1999 to the 2009. Richard Foster, a lecturer at the Yale School of Management, has found that the average lifespan of an S&P company dropped from 67 years in the 1920s to 15 years today. Foster also found that on average an S&P company is now being replaced every two weeks, and estimates that 75 percent of the S&P 500 firms will be replaced by new firms by 2027. An even more ominous statistic is for all companies both large and small demonstrate an average life expectancy of only 12.5 years.

Why are companies increasing failing to grow or sustain success?

Companies can fall off the S&P 500 when they get too small, or get acquired. No one really knows why the rate of turnover is speeding up however my own research says it is most likely tied to technological disruption and a lack of focus on core business. In the 70’s through the 80’s large companies believed the equation for success lied in diversification. We saw, during this period, large organizations expand through acquisitions and diversification with little or no synergistic capacity between operating groups. Then in the late 90’s we saw the emergence of disruptive technology innovation (Please reference a my previous post Big Bang Innovation and Effects of Creative Destruction). Since 2002, Google, Amazon, PayPal, Under Armor, Priceline, Verizon and Netflix have joined the S&P 500, while Kodak, the New York Times, Compaq, HP, Motorola, Sprint, Sears, Sun Micro Systems, Office Max, Circuit City, Novell, Radio shack, Black and Decker and Avon have all been forced off, essentially by changes in technology and relevance. Here is a more graphical representation:

What are key attributes to corporate longevity?

In studies conducted by corporations, independent research and academy I have observed the following four characteristics were consistently exhibited by companies able to exist and thrive beyond their statistical average :

• Sensitivity to their environment. Whether they had built their fortunes on knowledge or on natural resources they remained in harmony with the world around them.
• A cohesive and strong sense of identity.
• Support of Innovation. Being particularly tolerant of activities on the margin: outliers, experiments, and eccentricities within the boundaries of the cohesive firm, which kept stretching their understanding of possibilities.
• Conservatism in financing. They were frugal and do not risk their capital gratuitously. They understand the meaning of money and flexibility of having available cash reserves.

Factors somewhat surprisingly absent for longevity

• Short term focus on the ability to return investment to shareholders
• Short term focus on profitability as it appears more to be a sign of corporate health, but not a predictor or determinant of corporate health.

"Visionary companies put a lower priority on maximizing shareholder wealth or profits and display a powerful drive for progress that enables them to change and adapt without compromising their cherished core ideals."

Nature and it’s wealth of sustainable diversity

How does nature sustain an evolutionary process by which new species are formed and maintained with such a wealth of diversity? What prevents the single best competitor from displacing all other species? How do competing different species coexist for long periods of time?

 Tropical rainforests can contain 1,000 tree species in the area of fifteen city blocks with 945 beetles being found on just one species of tropical tree

Nature provides insights when developing corporate strategies

The mystery of species coexistence is rooted in the competitive exclusion principle, which states that two species competing for the same resource cannot coexist. The species that is better at gaining the limiting resource will eventually eliminate the inferior competitor. This intuitive idea has been central to the field of ecology since Darwin’s exposition of his theory of evolution. If a superior and an inferior competitor are placed into a habitat at initially equal abundance, the former will inevitably eliminate the latter.

Envision, for example, two rodent species, one that has a much greater ability than the other to consume seeds, the food resource limiting their growth. Eventually, the better seed competitor will win. If the differences in the competitive ability of species are large, the poorer competitor will be rapidly excluded. If these differences are small, exclusion will be slow.

The central prediction of the competitive exclusion principle lies in sharp contrast with what we see in nature; the coexistence of numerous species. This contrast poses an enigma. Ecologists resolve this enigma by reasoning that other species properties must prevent the elimination of the inferior competitors. These are what ecologists call niche differences, species differences that maintain diversity by preventing competitive exclusion. The niche defines how a species interacts with its environment. For example, the niches of the two rodent species include their diet; the quantity and size of seeds consumed. A niche difference between species arises, for example, when one rodent tends to consume larger seeds than the other. But how do such niche differences maintain species diversity? Envision a scenario in which the rodent eating large seeds become so common that its competitor becomes rare. This shift in rodent abundance will cause a deficit of large seeds and an abundance of small seeds in the habitat. Such a shift will benefit the small seed consuming species, at the expense of its competitor. Conversely, if the small seed consuming species becomes common, large seeds would be in abundance, allowing the large seed competitor to recover. Thus, the defining feature of a niche difference is that it causes each species to limit individuals of its own species more than it limits individuals of its competitor. Niche differences thereby disfavor species that become common and advantage those that are rare, which hinders competitive exclusion and maintains biodiversity. When the stabilizing effects of niche differences are stronger than the differences in competitive ability, species will coexist and diversity will be maintained.

An analogy to the more familiar case of competing businesses reinforces the way ecologists think about species coexistence. Two airlines sharing the same routes are not likely to both stay in business if passengers consistently value one airline over the other. Nevertheless, the less competitive airline can still persist by offering different routes than its superior counterpart, thereby capitalizing on a different customer base. How species diversity is maintained may seem an abstract concept to consider in terms of corporate sustainability and longevity, however, I propose that nature continues to demonstrate concepts and lessons we can learn from that are applicable to business strategy.

These are my own personal discoveries and observations and if you find this information informative please provide Comments ,Likes and feel free to Share the post with others in your network.

Thanks,

Kevin