‘We were born to die, and we die to live‘ (See 2 Corinthians 6:9.)
Companies are not born to survive and it is a mistake to believe they should invest in their own future. It is better if they expire and allow society to use the resources they waste selfishly prolonging their existence.
Shareholders know this. They invest in companies without caring much about what they do. If the company in which they have shares starts to do badly, they divest and find another. Or they encourage the aging company to perform more efficiently, cut consumption and pay larger dividends. Investors and, by implication, society do not want companies to waste their (the shareholders’) resources trying to find ways to survive after their time has passed.
Aging has distinct stages.
The start-up period is the one with the highest attrition rate. During this period, a company is inefficient. It does not understand its markets; makes frequent technological errors; and has no economies of scale. Its staff are learning rather than producing. They are finding out what works, and becoming aware of their operating environment. Nearly everything a start-up does can be called research and development. During this period, a company yields no returns and, because many fail before generating worthwhile profits, investors hold a portfolio of shares in such infant companies.
Those who survive start-up may be lucky enough to enjoy a period of vigorous growth during which they discover related technologies and markets and learn to exploit their happy situation through successive phases of growth.
Eventually and inevitably, a company matures into old age. Its markets have changed. Technology has moved on. During this phase profitability relies increasingly on doing what it has always done, but at lower cost. It can run its assets down. It can focus on efficiency. It can get out of marginal markets, concentrating instead on customers who may also be in maturing sectors. It is in a process of decline; and that’s OK for some investors. They know this and do not expect share price growth. Instead they are happy to buy this company’s stock so long as it continues to pay good dividends. Some companies in this phase acquire, or merge with, another to find synergies to prolong their existence for a few more years.
It is in this maturity phase however that companies are seduced into one of two unwholesome strategies to regain their former glory.
The first of these is desperate reinvention. They look for previously unnoticed technologies, capabilities and activities. They create something like a New Business Opportunities Group with a portfolio of enterprises that pretend to be start-ups. These fail, not because the business idea was a bad one, but because they can never break free from the suffocating, legacy culture. The author of this article remembers a time when he was simultaneously trying to sell biodegradable plastic, methane-derived protein, fuel octane-improver, cyanide disposal enzymes, and energy balancing systems, to puzzled, potential customers, totally bemused at our ignorance of their respective industries.
The second is rent-seeking. Some companies discover, or build, what Warren Buffet calls a ‘moat’. In Mr. Buffet’s words, “A good business is like a strong castle with a deep moat around it. I want sharks in the moat to keep away those who would encroach on the castle.” A moat is a barrier-to-entry for competitors. Companies who use them are called rent-seekers because the sit on an asset and extract ‘rent’ from it with the minimum of investment and customer service. By restricting competition and by diverting investment from R&D and capital into maintaining the moat, resources are squandered and society suffers. Moats can be created from legislation, control of a supply choke-point, a strong brand, ownership of common infrastructure and economies of scale.
This is not a dramatic revelation. It is only capitalism. Managers in all companies should assess objectively what phase their organization is in, what their options are, and whether they should be looking for another job.