How success kills companies

I originally wrote the fuller article (see link) in 2001 for the Institute of Management Consultancy. Unfortunately due to a reorganisation at the time they did not publish and I did not follow-up. In retrospect I should have.

Expectations of business longevity should be set low. Of the 100 largest UK firms in 1917, only 28 still existed by 1987 and only 18 of those were still top 100. In 1935, an S&P top 500 firm had a life expectancy of 90 years. By 1975 this had dropped to 30 years and by 2001 was 15 years.

Survivors do not perform. The market index (Dow, FTSE etc) consistently leads survivor performance and is not defined by it. Survivors systematically underperform both the market as a whole as well as their industries within it by up to 300 points. Indeed, were one to base the S&P on long-lived companies, the index would have depreciated 20% year on year from 1962.

New companies outperform incumbents and decay over time, suggesting that effective market competition is based on innovation (product competitiveness), not efficient operations (price competitiveness).

Why is the above the case?
Most CEOs spend most of their time pursuing operational efficiency of their company (a management task) as opposed to new markets (a leadership task).

Consequently incumbents fail to change at the pace and scale of the market. They tend to innovate around a continuum of their core products. Higher market value accrues to companies that introduce brand-new products (i.e. disruptively innovate).

Consequently incumbent companies enter "cultural locking" of their market position and product into the corporate psyche and build. Disruptive innovation heralds dilution of present earnings, organisational disruption and cannibalisation of existing fixed capital.

What should companies do?
They should act more like the markets. Create, operate and then "trade-out" their business units.

Create at the pace of the markets and destroy at the pace of the markets.

Buy companies at the early end of the growth curve or on the periphery of the established market at the same pace of investment as the capital markets.

Seek the business units they should sell-off - that is, those at the top of the market - to use those dollars better for new businesses at the bottom of the market. This also allows them to discount the top-end performer to the buying company who can use the saved capital to rejuvenate and re-tool the "incumbent" unit.