Some years ago, I was part of an oil company planning group that studied the average lifespan of hundreds of distributors and jobbers in the mid-Atlantic states. These companies, all customers of ours, sold fuels, lubricants and propane. They were privately owned, many of them family operations, and company ages at the time ranged from one year to more than 20 years.
We were surprised to discover that our average distributor lasted only seven years. Some merged or had been sold, but a surprising number had simply failed. This information was helpful to our credit department, but we regretted that we didnt have the opportunity to examine the reasons why those companies had gone out of business. Since then, I have been particularly interested in factors that cause some companies, large and small, to last as long as 100 years and others to fail at earlier stages.
Some experts claim that if a startup company can survive its first three years, it will survive until…who knows?
The U.S. Bureau of Labor Statistics says that one-third of new small businesses exit during their first two years, and half within their first five years. The U.S. Census for the 1977-2014 period found that, of all U.S. establishments, 75 percent had survived for more than one year but only half for more than five years. For those listed on the S&P 500, Credit Suisse estimates a current longevity of 20 years, but consulting firm Innosight predicts only 12 years by 2027. Much has already been written about this, but here are a few of my observations:
1. Successful long-term companies like ExxonMobil make a point of recruiting and training a deep bench of highly qualified individuals to fill critical future positions. (This can be good for the company but discouraging to the employee. I left Exxon after 18 years partly because there were too many equally talented people in the pool.)
2. Companies that fail sometimes become convinced that what they have always done will continue to be good for the future. They do not keep up with new developments. Kodak, for example, realized too late that historically profitable film was being quickly replaced by digital photo technology.
3. Managements ability, or lack thereof, to recognize changing business conditions, and then quickly adapt, separates successful long-term companies from those that will eventually disappear. Microsoft almost blew it by being slow in the 1990s to recognize the importance of the internet.
4. Lack of proper financing, poorly-conceived business plans and mediocre management skills increase the probability of failure for new startups.
5. Family businesses are often sold or shut down because second- or third-generation family members are inadequate or have little interest in the company. This problem should be recognized early, and capable outside management brought in with full, unhampered authority.
6. Companies that lose touch with their customers changing needs or fail to understand the huge importance of retaining their existing customer base will ultimately fail. No amount of advertising to attract new customers can replace the long-term profitability of keeping current customers pleased.
Jack Goodhue, management coach, may be contacted at goodhue@aol.com.