As global competition and technological changes make their force felt on industries, it can be hard for businesses to focus on anything beyond immediate survival. Some have survived and thrived over decades and even centuries. We explore the secret to achieving corporate longevity.
Corporate history is littered with examples of large companies that have been hugely successful in their industries for years but, at some point, go into crisis and go under. They might have been a familiar part of the corporate landscape for a generation, but the seemingly unthinkable happens and they go into decline. This should hardly come as a surprise. The fact is: corporate mortality is more common than corporate longevity.
Changes in company listings give a clue to corporate death rates. According to research conducted by Richard Foster and Sarah Kaplan in their book ‘Creative Destruction’, of the 500 top companies listed by S&P in 1957, only 74 still existed 40 years later. A look to the future is more disconcerting still. According to Foster, by 2027 more than three-quarters of the S&P 500 will be companies we have not heard of yet.
Company lifespans are getting shorter
The pace of change is accelerating; from 1958 to 2011 the average lifespan of top companies dropped from 61 years to 18. Corporate longevity is the exception, not the norm. What does it take for a company to buck this trend, to survive and remain relevant in our highly competitive, fast-changing global economy not just over years, but over the very long run? What can we learn from those companies that succeed in achieving this feat? How have they succeeded where so many others failed? Are they more innovative and willing to adapt, or are they particularly resilient? Does their enduring strength derive from strong leadership or is it embedded in the company’s culture? Whatever the secret ingredient is, how is it passed on to successive generations?
Is there a single answer to longevity?
“If I knew the answer to this question, I would be a very rich man,” says Leslie Hannah, Professor of Business History at the London School of Economics. Hannah has studied corporate longevity in detail during his career. His 1999 paper ‘Marshall’s “Trees” and the Global “Forest”: Were “Giant Redwoods” Different?’ tracks the histories of the big international companies of the 20th century. Starting with the 100 largest companies in the world in 1912, as measured by market capitalisation, the paper finds that, by 1995, nearly half had disappeared and, of those that survived, only 19 remained in the top 100.
Longevity is no guarantee for future survival
Hannah now lives in Japan, home to some of the oldest companies in the world, a few of which can look back on a history spanning more than 1,000 years. Amongst them were, until relatively recently, a Buddhist temple construction company called Kongo Gumi. Established in 578, it laid claim to being the oldest continuously operating family-owned business in the world, with ownership passing from one generation to the next for 1,428 years. It survived many hard times, but in 2006, faced with mounting debt and declining demand for temples, it went into liquidation. The fact is, extreme longevity is no guarantee for continued survival, so what is?
Transferring knowledge is key
Around the world there are examples of small, usually family-owned businesses that can claim to have survived over centuries, such as the Hotel Interlaken in Switzerland, first mentioned in 1323, or the watchmaker Gallet & Co, dating back to 1466. But what does it take for a large international company to survive? Hannah concluded in his study that one key to success was the ability to ‘operate distinctively’ in order to have and retain a competitive edge, but equally important is the ability to escape the constraints of individual markets by using your capabilities to transfer to new industries. Many corporate deaths are caused by an inability to do this.
Changing with the times
Hannah gives examples of large coal, textiles, and railroad manufacturing companies that dominated the world in the early 20th century, but collapsed when technology moved on and their markets dried up. They had no relevant capabilities to transfer to new industries. “Every company that survives undergoes some sort of transition,” explains Hannah. “But some changes are more radical than others.” He gives the example of the American Can Company, which made its name in the first half of the 20th century in the then new tech area of tin cans. When it saw how plastic was replacing tin, it succeeded in shifting industries altogether, leaving manufacturing and entering financial services. “A company that changes nothing in a changing world won’t last long,” says Hannah. “But any transformation has to be built on existing capabilities – this is the reason why the stock exchange will provide the funds.” In other words, companies that succeed in surviving major changes in the economy do so by striking the balance between staying true to their core competencies and also by changing with the times.
Companies can’t afford to stay still
Cyril Bouquet, Professor of Strategy at IMD (International Institute for Management Development), a Swiss business school, works with large companies with a long history that are reinventing themselves to stay relevant into the future. He agrees that no company can afford to stand still. He has also carried out an analysis of company lifespans. “Out of the top 100 companies that existed in 1900, only one is still in existence in exactly the same shape and form today, that company is Ford Motors,” he says. “There are 16 others still in existence, but when you look at them you can’t be sure it’s still the same company.” The conclusion Bouquet draws from this is, if you want to be around for the long term, you need to evolve. “We can find only one example of a company that has stayed very close to what it was and has managed to survive. The other 16 companies that survived evolved a lot. The others have simply disappeared. They weren’t small companies. They were the top companies in the world at the time.”
At this point it may be worth asking whether a certain amount of corporate death isn’t healthy for the economy. Economist Joseph Schumpeter described the innovative character of capitalism as ‘creative destruction’ – incessantly destroying the old economic structure while creating a new one. There is clearly something attractive in this idea. We only have to look to the dynamic entrepreneurial culture in the US – a country that fosters innovation and thrives on the new. It is based on the premise that if a new business idea doesn’t work, you close it down and move on. Yet as we destroy the old to create the new, what gets lost along the way?
In with the new and out with the old?
“Sometimes it’s best for a system to run its course so that you can create a new one without all of the rigidities that are built in the old system that is trying to survive,” explains Bouquet. But not all destruction is good. “When you destroy, you destroy a lot of good things, such as the great abilities and skills that have been developed over time. There is a tendency to think longevity is not important, that the market will take care of things. What that view neglects is the good things that are lost in the process of destruction.” It is not just the skills and abilities, but the social cost and trauma caused by job losses. There is a ripple effect when a big company goes under.
Bouquet is a self-confessed proponent of longevity, provided the process of evolution can be facilitated. His definition of the long term is very long indeed – he encourages executives to think beyond their own lifetimes, to imagine how their companies can continue to be relevant a century from now.
Most big companies are afraid of change
But how many companies are able to do this? “Very few,” says Bouquet. “The reality is that most big companies are not structured in a way that allows this to happen – there is so much about the way that they act and think that prevents them from adapting to the world.” In his work with leading French companies such as SNCL, Veolia, La Poste, and Carrefour, he has seen that, while they want to reinvent themselves to adapt to the demands of today’s markets, they are afraid of losing their ‘soul’ in the process – of becoming a different company altogether. He understands this fear. “It’s not just about replacing an old world with a new one, but being able to marry different logics.”
Bouquet explains that the logic of the past is just as important as you move into the future, but it comes with rigidities that need to be eliminated. “Finding the balance is not easy.” There are clearly some industries where change comes more naturally than others. The worlds of fashion and media are heady and fast paced – what is ‘in’ today may be ‘out’ tomorrow, and that is precisely what customers in these markets value.
History is important in banking
Banking, it could be argued, is at the other end of the spectrum. “One thing you want when you put your money in a bank is some sense of certainty you might get it back,” says Hannah. “This is why you are likely to favour one that’s been going on 100 years, over one that’s just opened.” A bank may be proud of being highly innovative and high tech, but alongside this it will also emphasise its long history, not just to celebrate an impressive achievement but to inspire customer confidence in its future performance.
Some industries are so new that rapid and dramatic change is part and parcel of doing business in these sectors. Many of today’s high tech giants operate in markets that didn’t even exist as recently as 10 years ago. Digital businesses such as Google, Facebook, Twitter, WhatsApp, and Instagram have come from nowhere and ballooned to become household names almost overnight. But the same forces that have enabled them to grow so quickly can also lead to their swift demise, because barriers to entering the digital world are lower than in the world of real physical infrastructure.
Know your competition
Competition can take any of today’s incumbents by surprise and render them irrelevant at lightning speed. Look at what happened to MySpace. In the new digital business sector, survival over years, rather than decades, should be considered impressive. So can any of these companies hope to still be here in 125 years’ time? Looking beyond the here and now is the key to sustainability “Google is an interesting case,” says Bouquet. “The way they think about what they are trying to do means they could be there for a very long time.” Bouquet is talking about Google’s long-term strategy, which has seen it, in recent months; explore opportunities in robotics, self-driving cars, and anti-ageing technologies. For a company that depends almost entirely on one revenue stream – online advertising – this is not just visionary; it might one day be essential to its survival. They know that relying on a single source of income is risky, so they are using their current economic muscle to build capabilities in what might become the billion dollar industries of the future.
Bouquet explains: “It’s not about predicting the future; it’s about trying to decide what sort of future you want to build – what sort of company you want to become.” At the heart of this process are values. In order to define where the journey is going, a company has to know why it exists, what its purpose is. If it is clear on this, then it can define what sort of company it wants to be. “For Google, it’s about seeing itself as a company that can leverage technology to solve big problems and make people’s lives richer and easier.”
Have a very long-term vision
The visioning process is fundamental to long-term survival, and Google isn’t the first to employ it. “Look at Nestlé,” says Bouquet. “When they decided to move from being a food and drink company to being a leader in nutrition health and well-being, they engaged interested parties around the company on a 30-year journey. They were trying to define what sort of company Nestlé would become and what success could look like 30 years down the line.” In the 1970s, Nestlé had already been around over 100 years. However, recognising that radical change was taking place in their markets, they began diversifying first into skincare and then pharmaceutical products. By 2005, Nestlé’s chairman made clear that the company’s direction was towards becoming a provider of products and services in the areas of nutrition, health and well-being, and in 2010 they announced the creation of Nestlé Health Science and the Nestlé Institute of Health Sciences, aimed at the prevention and treatment of chronic medical conditions with science-based, personalised nutrition solutions.
Executives should think “marathon” not “sprint”
But to return to our opening premise, in a world of global competition and fast-paced change, who has the luxury to devote time to this sort of question? Bouquet acknowledges that this is difficult. His research shows that most executives spend as much as 90 percent of their time on the present and only 10 percent thinking about the future. “They are running a series of sprints,” he says. “But you can’t run a series of sprints without running out of breath. To be sure, you need to win the sprint – there’s no way of avoiding it – but you also need to win the longer race, the race for relevance in the long term.” Therefore, time must be devoted to looking to the future.
Longevity is not a “one man show”
Bouquet is equally adamant that the job of creating the future cannot be the exclusive responsibility of a single great leader or management team. “A lot of companies fail because they’ve had charismatic leaders, but when those leaders leave, they never really recover.” Many people have wondered how long Apple can thrive beyond Steve Jobs. According to Bouquet, a company that wishes to survive over the long term needs to instil a culture of co-creation amongst its employees – that they are all responsible for visioning the future. Hannah, by contrast, describes how companies successful in the long-term continue to retain a competitive edge from operating distinctively by transmitting ‘tacit learning’ down through managerial generations. “It has to be tacit because if it can be codified or written down, it can be taught to others outside the company and the competitive advantage is lost,” he says. “At companies successful over the long term, there is an understanding which is just ‘in the air’ and understood by the participants – it can’t be copied.”
The future is created today
Addressing the future today will save a company tomorrow It is tempting to conclude that corporate longevity comes down to a mixture of luck – the time and industry a business operates in – and an elusive secret; something individual to those who succeed that by definition cannot be copied. But what Bouquet suggests is that it’s also in a mind-set and a clear and concerted approach to the future. Companies have to be willing to take a long-term view. “Yes, it is difficult and there are low incentives for doing so,” he acknowledges. “You never know if what you are doing today to create a long term future is going to be right or wrong. There’s always a temptation to believe that the future will be created by the people who come next. But actually that’s not true, the future is created today.” When a company celebrates an anniversary – whether it be 10, 50 or 100 years – it should not only use the occasion to look back and celebrate milestones, but rather envision what it might look like in years to come.