The purpose of this article is to bring awareness to investors regarding the shortening lifespan of companies in the market today. For conservative, long-term investors, it is important to look for companies that not only have economic moats, but are also actively engaged in innovating and reinventing themselves.
How long do businesses generally survive?
The magic number, a new study from Santa Fe Institute in New Mexico reveals, is about 10 years. The average lifetime of companies is shrinking. If you were listed in S&P 500 in 1935, the life span was 90 years. Today, it is 18.
Publicly-traded companies die — through acquisitions, mergers, bankruptcy or other reasons — at the same rate, irrespective of how well-established they are, or what they do. Some file for bankruptcy or lose market share to competition. Others are acquired. The latter reason has been especially significant of late — 2015 set records for deal making, with more than $5 trillion in mergers and acquisitions.
Why does this happen?
Every new venture that survives the first five years starts to drift away from its entrepreneurial thinking, and assumes it has achieved the path to longevity. In fact, even within Fortune 100 companies, almost 90 percent have encountered growth stalls or flirted with failure, or worse, in the last 50 years. No company can afford to lose the agility, flexibility, and innovation of a startup. Great firms can slip away from entrepreneurial thinking by doing any or all of the following:
lCompetitors are easier to track than new opportunities. Competitor statistics are the domain of analysts, financiers, and shareholders, so it is attractive for companies to focus on them. Opportunities which may be built from innovation are the stuff of dreams and passion, relegated only to entrepreneurial thinking.
lEfficiency focus strips away resources from innovation. Through cost-cutting and highly-specialized hiring, firms unintentionally eliminate the capacity to innovate and adapt to change. The drive for resource-based advantage can be profitable for big companies, but it is never permanent.
lPenalties for management learning experiences. In an entrepreneurial venture, errors are expected, and even celebrated when positioned as learning opportunities. In stable corporate ventures, mistakes are seen as a sign of incompetence, and penalized by loss of bonuses or position.
lThe future is extrapolated from internal data analysis. Metrics and observations while running the existing business become the primary basis for future projections. This data reinforces what they already know and believe, so a divergent path rarely looks attractive. The result is a self-fulfilling prophecy that often leads to disaster.
Disruption and innovation means average lifespan of companies is shrinking and this calls for change in strategies, organizational models and courageous leadership.
A company cannot endure in the long term without reinventing itself. Which means leaders have to be vigilant for pitfalls — weakening foundations in business models, or shifting needs of customers.
While India is at a different tangent of growth, being an emerging country, a lot of sectors are already facing these issues. Large demand due to huge population hides a lot of fault lines which could get exposed. Investors will have to constantly be on watch for weak signals from companies to ensure that stocks they own do not fall prey to this phenomenon of shortening lifecycles of companies and/or businesses. This process will also help in identifying super performers which will give them above average returns for a reasonably long period of time.
— Deepak Jasani, Head (Research), HDFC Securities