Companies dying young but centurions thriving – Part I
We are in an era of accelerating change in which the life spans of big companies are getting shorter than ever. However, there still are organisations that have survived over centuries
We have stepped into a turbulent era when the average lifespan of organisations is shrinking dramatically. A new study by the S&P 500 – the reputed equity index operated by S&P Dow Jones Indices to track stock performance of the largest 500 companies listed on US stock exchanges– reveals that we are already in a stretch of accelerating change in which lifespans of big companies are getting shorter than ever. A tracking of corporate longevity of S&P 500 firms shows a steady churn rate of companies dropping off the index as new entrants join the list and corporate longevity continue their downward trajectory. The latest analysis shows the 30- to 35-year average tenure of S&P 500 companies in the late 1970s is forecast to shrink to 15-20 years this decade.
Source: S&P Dow Jones Indices
Companies are dying younger because they are failing to adapt to the growing complexity of their environment. Many misread the environment, select the wrong approach to strategy, or fail to support a viable approach with the right behaviours and capabilities.
The impact of the digital revolution on the S&P 500 and the emergence of hybrid industries
A process of creative-destruction has been set in motion that is transforming the composition of the S&P 500 over time, with industrial companies decreasing while infotech companies increasing. Three specific hybrid industries – digital healthcare, retail-tainment, and e-mobility – are ushering in this change.
In the case of retail-tainment, it refers to the merging of the retail and entertainment sectors. E-mobility refers to the transformation of the fuel and transportation industry with the inclusion of new players. Digital health refers to the consumerisation of traditional healthcare services, accelerated by the COVID crisis.
Digital & Sustainable
Successful companies in these industries are digital, sustainable, and leverage their core strengths to benefit from market forces and growth opportunities. Companies should take advantage of favourable market conditions (tailwinds) to accelerate their growth, while those facing declining demand need to act quickly to catch up.
In fact, the 33-year average tenure of companies on the S&P 500 in 1965 narrowed to 20 years in 1990 and is forecast to shrink to 14 years by 2026.
Record M&A activity and the growth of startups with multi-billion-dollar valuations are leading indicators that a period of relative stability is ending and that an increasing number of corporate leaders will lose control of their firm’s future. The storm warning to executives is the forecast churn rate, which indicates that about half of the S&P 500 will be replaced over the next 10 years.
10-years-old and a wise old grandpa
In Silicon Valley, any company that survives for more than a decade is considered a wise old grandfather. This is indicative of a larger trend: in the modern business world, longevity is increasingly rare.
Historically, the average lifespan of a multinational corporation has been between 40 and 50 years – a figure that has, converse to the human lifespan, gradually been on the decline.
A recent study that analysed thousands of European firms, yielded a corporate life expectancy figure of a mere 12.5 years. This seems to be at least partially corroborated by the fact that more than one-third of the corporations on the 1970 Fortune 500 list were no longer in existence by 1983.
Companies are dying younger
Companies are dying younger, but are also more prone to collapse at any given time. According to a Boston Consulting Group report, “one-tenth of all public companies fail each year, a fourfold increase since 1965.”
No business will survive without inventing itself. It is important to know when to reinvent by constantly challenging the status quo. A glorious past is no longer a guarantee for a bright future as corporate longevity is decreasing at an alarming rate. But at the same time there are organisations that have survived thousand – yes, thousand years.
Across the world 967 businesses founded prior to the year 1700 (and some dating as far back as 578 AD) are still in operation today. A mind blowing 53% of these companies, 517 of them, are located in one country: Japan. The second-best country, Germany, has a mere 19% of the world’s oldest businesses, most of which are breweries. After that, no other country boasts more than 5%.
Look out for Part 2 where we discuss more about Japan – the land of the youthful elderly, how being flexible is critical for sustainability, and the concept of the “Living Company”.
[To be concluded]
