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The company life cycle

20 April 2015

The company life cycle - read more

Company lifespans are getting shorter, says Anthony Hilton

The London economy is growing faster than either Singapore or Hong Kong – and it is not financial services that is fuelling the growth. This sector has a part to play, however the real engine for growth is what economist Doug McWilliams labelled ‘The Flat White Economy.’ This generic term captures the technological explosion born of the arrival of thousands of computer-literate young people whose lifestyles seem to be a seamless mix of work, play and coffee shops.

He says that the EC1V London postcode has seen 32,000 new businesses established since the Olympics three years ago. These new businesses have created more jobs than finance has lost. The technology sector is already more important to the UK than the motor industry or oil and gas. At current growth rates, in 10 years it will account for roughly a third of the UK economy. This has happened at great pace, which carries a remarkable message about the longevity of companies in the modern world.

Public companies do not prosper like they used to. It is almost 31 years since the FTSE 100 stock market index was launched and only about 10 of the original companies listed survive in the index today – great names like Thorn, ICI, P&O, Lucas and Hanson are no more.

There is a similar pattern in the United States. According to Yale Professor Richard Foster, in the 1920s, the average age of the companies in its main index was 67 years. By 2012, the average age had shrunk to just 15 years. There are suggestions that today it is even shorter.  

Technology has changed how businesses compete. Even traditional firms are dependent on modern technology for design, innovation and marketing. The real value of the business is often lodged in these soft skills more than in traditional production processes. Yet because these skills are knowledge based and people oriented they are harder to patent and keep secret. People move jobs and the business’ competitive edge goes with them.  

Another problem is the pace at which things happen and the speed with which management is expected to react. The command and control vertical hierarchies of traditional management worked well when layers of middle management were needed to relay information from top to bottom. This worked when innovation was slow, competitors took years to emerge and incumbents could evolve new products over several years.

Today such hierarchies struggle to respond fast enough. Established companies find it hard to innovate because employees have a vested interest in maintaining the status quo, so those promoting change will be a minority. By the time new ideas or inventions have got recognition it is often too late. That is why new and revolutionary products come from new kids on the block. Companies tend to be either innovators or harvesters. Very few are able to do both – and there are even questions about Apple’s resilience now it is no longer run by Steve Jobs.

In publicly quoted companies, the pressure for ever-rising profits and short-term results mitigates against the long-term research and risky innovation which underpins longevity. Instead companies secure their future by acquiring others with better products or ideas. Sometimes this works but often the culture clashes cancel out the benefits. The message is that modern public companies need to think more clearly about their core objectives and to devise organisational structures which are suited to that purpose – but this may be asking too much if the problems are endemic to the system.

The lifespan of Japanese companies has not been foreshortened in the same way, suggesting it is a Western problem. Japanese managements are less susceptible to outside pressure. They take little notice of shareholders; finance most investment from retained earnings; hostile takeovers are taboo; and the whole ethos is towards continuity, consensus and longevity.  

The Japanese even have a word – shinise – for long-lived companies. They claim to have the world’s oldest company, founded in 705 AD. Japanese academics say this longevity results from private businesses tending to be small and therefore easy to pass down the generations, and because profit is seldom the main driver of strategy.

If longevity requires thinking beyond short-term profit, is the public company as it now exists in the West doomed to die young?

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