Revisiting Corporate Longevity

Corporate Mortality Continues to Rise

According to Innosight’s paper, Corporate Longevity: Turbulence Ahead for Large Organizations (2016), over the next 10 years, half of the current members of the S&P 500 index will be “gone.” Death by disruption, eaten by M&A, or delisted unceremoniously. What is clear from research is that the pace of corporate mortality has picked up over the last decades: In 1965, the average life expectancy was 33 years; in 1990, it edged down to 20 years; and in 2026, it’s now projected to be 14 years (for more stuff on corporate longevity, see here, here, here, here, and here). As innovation professionals, we should keep a close eye on corporate mortality trends because it’s a proxy for creative destruction: the higher the index turnover rate, the greater the need for organizational transformation (via innovation and M&A). At the end of the day, longevity studies show that long-term survivors transformed themselves through disruptive changes. They re-emerged as new businesses by strategically reconfiguring their resources and assets by actively exploring new areas for growth. Thus far, only a handful of companies have been able to do so.

Why Do Companies Die?

Obviously, we don’t “know” for sure why the life expectancies for large, well-managed companies are shortening, but research suggests there are some known probable causes. In this post, we’ll discuss three of them: increased complexity; technological change; and the current malaise of “short-termism.”

According to BCG, “businesses face ever more diverse environments, which are often harsher, less predictable, and more malleable than classic environments.” The increased complexity of the business environment in recent years has forced companies to seek out different strategies to cope with change. In the book, Your Strategy Needs a Strategy, the authors point out there are five basic business environments and appropriate strategies (Classical: be big; Adaptive: be fast; Visionary: be first; Shaping: be influential; and Renewal: be different). Not only do business need to correctly understand what environment they are operating in, they also need to correctly match and executive the right strategy.

While most corporate longevity researchers agree that the pace and impact of technology is increasing and is a major cause of death, Vijay Govindarajan, a Dartmouth professor, makes a novel observation. His research found that “recently listed firms are dying more quickly.” He explains, “The newer firms are grounded in novel business models, like digital services, that can be launched and distributed quickly, … This gives them an advantage over production firms, because ‘idea’ companies don’t require an expensive infrastructure of factories, warehouses, and suppliers.” While the new firms are extra nimble, they are prone to imitation and, therefore, they must continuously innovate to survive.

Lastly, another reason is a increasing mortality is the focus on the short-term and a lack of a coherent vision of the future. 61% of decision-makers would “cut discretionary spending to avoid risking an earnings miss, and a further 47% would delay starting a new project.” 65% of executives expressed concerns that the short-term pressure has increased over the last five years. It looks like we are totally in “short-term” mode, as evidenced by an increase of share buybacks and a noticeable decrease in capital investments. Given all this attention is being paid to the short-term, it’s no wonder that some researchers point out that many organizations lack of a coherent vision of the future (per Innosight, only 24% of companies had a long-term vision).

For Long Life, Companies Have to Become Dynamic

On a positive note, corporate longevity research also shows that there is a way out of all this. Organizations can attain long-life by becoming “dynamic.” The dynamic view assumes that organizations need to constantly adapt to their environment to ensure economic success and long-term survival. In other words, they must become ambidextrous, both exploiting the current business and exploring new businesses at the same time. However, given the exclusivity of focus on short-term shareholder value (meaning, stock price), many companies are drifting away from exploring new business opportunities all together. That really is a mistake. In our next post, we’ll discuss future-orientation and its benefits.