Companies are like living creatures. They come into the world and, once they survive their teething troubles, they mature and eventually cease to exist. Sometimes, if they’re not killed off by bankruptcy, they even reproduce through the medium of merger or acquisition. Arie De Geus, a retired Shell executive, has conducted research that shows the life expectancy of new firms in Europe or Japan to be less than 13 years – down from 20 in the late 1970s and early 80s. Even if they grow up to be large multinationals they’re likely to last only 40 to 50 years in total. And Foster and Kaplan estimate that by 2020 the average S&P 500 firm will stay in the index for just ten years – down from 65 in the 1920s, when the list first appeared.
There are, as usual, exceptions. Like giant tortoises, there are some companies that have made it to over 150 years of age. But they tend to move like giant tortoises too. All the evidence points to the conclusion that the financial performance of long-lasting firms is below the market average. As Foster and Kaplan say, “the corporate equivalent of the El Dorado, the golden company that continuously performs better than the markets, has never existed. It is a myth.” Managing for survival doesn’t guarantee strong performance for the entire corporate lifespan – in fact, just the opposite.
The ephemeral nature of success and the natural tendency towards mediocrity and eventual failure is the rule for all systems devised by mankind, whether countries, industries, economic structures or superpowers. Since the beginning of human history, empires have come, seen, conquered... and disintegrated. Persia, Greece and Rome took it in turn to dominate the ancient world. Since then, there’s been a succession of empires, culminating in the presence of a single superpower at the end of the 20th century. But change is already underway. Many people say that the 21st century belongs to China.
Since the industrial revolution, entire economic sectors have risen to preeminence only to lose their appeal as others gained in significance and profits. The canals and railways dominated the 18th and 19th centuries, finally giving way to oil and steel, followed by car manufacturing in the 20th century. In the last one hundred years, electrical appliances, telecoms, banking, pharmaceuticals, consumer electronics and financial services have all risen to prominence. Now, at the beginning of the 21st century, all of these have been eclipsed by the new stars of the information industry (despite a small blip at the end of the millennium). Right now, search engines and social networking sites are all the rage, but who knows what tomorrow will bring?
© Spyros Makridakis, Robin Hogarth and Anil Gaba, 2009