Escaping the Business Paradox

Dow Jones Industrial Average since 1928

Trends are easier to see looking back. Even better, when there is some objective method for documenting occurrences and developments over time.

On a personal level, a journal kept for years allows you to peak into a former self. Working on a resume has a similar effect of prompting you to look back on your career.

Records of daily trading kept for nine decades are a good document to the evolution of (traded) business: from industry concentration to service-based and technology-focused.

You may have noticed a decrease in the average time span a U.S. company is listed. Human lifespan has been outpacing corporate lifespan. We live longer. Yet, average company life expectancy has been decreasing for a number of years.

Everything has accelerated, including the speed of communications. But creating and sustaining positive impact is still about effectiveness. And that still comes down to longevity.


How compounding works

Simply put, while you're expected to “hit the ground running,” “deliver quick wins,” and “accelerate growth,” all while “multitasking,” if you truly want to grow anything, time is your friend. The longer you can cultivate a tree, the longer you can leave your money untouched, or the longer you can keep with a high leverage action, the more value they accumulate.

Longevity is typically a word we use to talk about long-lived members of a population. But you could ascribe length or duration of life or viability also to entities for sustaining work. Want to become more influential? Take advantage of the compound effects of a series of high leverage activities practiced every day.

And stay away from bad decisions made through errors in judgement. It's important to practice both. Those little decisions that seem trivial? They catch up with you.

Cultural practices in companies are an area of opportunity to figure out the trade-offs between speed for innovation, and longevity for sustaining.


Exhibit A: decline of competitive markets

There are fewer options in many markets. The Airline Deregulation Act of 1978 in the U.S. had unintended consequences: now four airlines control two thirds of the market.# Some routes give you but one or two options. As a result, you pay more for worse service.

That applies to international routes from the U.S. as well. Years ago, several international airlines flew out of Philadelphia. British Airways and Lufthansa are the only two surviving European companies. On more than one route, if you want to fly international without 2-3 changes, you have to trek to Newark or JFK.

Americans pay more for broadband 50 percent or more# — and more than twice the cost of using a mobile phone than Europeans.# Italy has twice as many choices as well, with new entrants providing better service.# Higher market concentration is the culprit.# 

As Greg Satell explains:

Yet the problem is more than just Americans getting ripped off by corporations who are able to charge us more and give us less. Fat and happy industries tend to underinvest and become less competitive over time, enjoying short-term profits but putting the economic well being of the country in serious jeopardy.

While we're seeing signs of an increase in investment in European companies, American corporations are under-investing.# Yet, as Satell points out, they're reporting strong profits.# And this is exactly the problem Tunjic outlines: “Under this new stage of capitalism, the capitals are no longer transformed to create the greatest value but the greatest profit.”


Exhibit B: corporate life-spans

While average U.S. lifespan increased by sixteen years from 1937 to 2012, the average time that firms remain in the S&P 500 during the same time period has fallen from 75 to 15 years.# And S&P 500 companies’ lifespan continues to shrink.# 

Due to the dominant role of technology and shareholder pressure, companies have been moving through their lifecycles twice as fast as thirty years ago.# Chief Executive Officers (CEOs) have been leaving their companies in droves. Even in good economic years, the number of CEO separations has been trending up.#, #

New business pressure and burnout are some of the reasons. But it’s not just CEOs in the hot seat. With uncertainty and social activism rising across the globe, leaders in any company and industry are feeling the heat. Shareholder primacy seems to dictate a painful trade-off between success and longevity.

But former head of Royal Dutch Shell's Strategic Planning Group Arie de Geus says “the dichotomy between profits and longevity is false.” Because the two are interwoven in a way that is qualitatively different in the knowledge society.# de Geus called managing for profit and maximizing shareholder value “vestigial management tradition.”

Yet stagnant wages, along with higher prices and worse service are evidence of the continued trend in the opposite direction.


Escaping the business paradox

The longevity of companies depends on two factors: repeating success and innovating. Many early successes are not repeatable at scale. Over time, innovation is the best path to continuous growth.

Enterprise has scale, but where fewer market choices drive customer lock in, there's no incentive to improve products or provide better service. This is the reason why customer experience ratings for telecommunication companies and airlines are consistently low.# An unfavorable price / value ratio also creates higher expectations.

Repeating success is harder for new entrants, given the market lock in of established companies. But repeatability creates stability, which is good if a company is to survive. And we need more new companies to survive over time. Do efforts to improve efficiencies eventually end up harming creativity and innovation?

We can have both: repeated success with efficiencies and scale, and continuous innovation. But likely, not in the same team. Because the innovation team needs to be operating outside the corporate dogma to test new ideas.

Safi Bahcall says you should keep the teams separate. Companies should nurture Loonshots, or “neglected project(s), widely dismissed, its champion written off as unhinged.”

One cannot help but wonder: have companies become too risk adverse? In other words, have the incentives been stacked too much in favor of franchise behavior, or worse, rent seeking and regulatory capture? Has the culture of work become resistant to culture altogether?

Would the companies that succeeded even ten years ago be able to survive long enough to establish themselves in the current risk-averse environment?

Satell says, “it's time to claim capitalism back for ourselves.” I say the way to do that is by addressing the inefficiency that “reduces the total value available to sustain individuals, corporations and even nations.”

Longevity thinking can turn money into something of greater value. It can reverse the dangerous trend of under-investing in our future. We need to choose our reference data with better care and create the conditions for more companies to go beyond survival.

Even in science, some of the best discoveries happened by chance. And different choices are a good thing: they keep everyone doing the work.


[image via Visual Capitalist]


My work is at the intersection of culture and strategy. The tools of my trade are conversation, writing, and anticipating trends. Many of the things I write about include design—of things, but also relationships—and research—talking to people we can gain perspective on the gap between what people say and what they do, including us (companies).

I synthesize a lot of interesting data and stories in notes that attempt to minimize overwhelm and maximize joy.


Leave a Reply

Your email address will not be published. Required fields are marked *