By Michael A. Roberto, D.B.A, Bryant University, and four others
Imagine you are working in or maintaining a healthy company. You’re producing strong earnings, and you have competitive advantage over your rivals. So why is it unlikely that you’d still be on top a decade from now?
Let’s answer the question of why some businesses fail. More importantly, how do companies maintain their longevity?
Maintaining a Healthy Company Is A Complicated Task
The Kauffman Foundation did an interesting analysis several years ago of the Fortune 500. Starting back in the 1950s, Fortune magazine produces a list each year of the 500 largest firms by revenue. The foundation looked at how many of those firms remained on the list as time transpired.
Looking at the original list produced in 1955, they asked how many firms remained on the list 30 years later. Three decades after the original list was published, about 250 of the original 500 firms were still among the 500 largest firms in the country. Half of the firms were no longer on the list.
This is a transcript from the video series Critical Business Skills for Success. Watch it now, on The Great Courses Plus.
They next looked at firms on the list in 1995 and compared it to the last couple decades to see how quickly firms fell off the list. Interestingly, they found that it took less than 15 years to get to a point where there are only 250 survivors on the list.
Put another way, they examined the turnover, year by year, on the Fortune 500 list. What they found is that while there have been some fluctuations over time, the overall trend is a steady increase in turnover the last few decades among these leading companies.
Learn more about the importance of understanding your competitor
Only The Paranoid Survive
Some years ago, Andy Grove—the longtime CEO at Intel, wrote a book in which he talked about the notion that only the paranoid survive. He said as a leader, you have to always be ready to confront new competitive threats, be ready to scan your environment, and spot the new, emerging rival that might knock you off. If you’re not paranoid, you won’t stay on top.
Let’s take a look at what’s been happening in just a few industries in recent years.
In the movie-rental business, Blockbuster used to dominate until Netflix toppled them. In music, we used to visit stores like Tower Records to purchase CDs. Today, we stream music digitally. Most of us, when we’re thinking about traveling to another city, think about getting a hotel room. Yet many people today use Airbnb to find a room that someone is willing to rent for a short period of time.
Only the paranoid survive. In each of these industries, we’ve seen a disruptive threat arrive, emerge, knock off, or at least threaten, the incumbent players who were successful some years ago.
Learn more about Netflix’s ultimate domination of the video rental market
There are four key facts about competitive environments and of the companies that are trying to win in those environments.
Industries vary widely in their profitability
Warren Buffett once said, when an industry with a reputation for tough economics meets a manager with a reputation for excellent performance, it’s usually the industry that keeps its reputation intact. In other words, if you’re in a really tough business, it’s going to be difficult to make money no matter how smart the management team is, even if you think you have a great strategy. For many years, that business has been one where the fundamental economic forces are causing profitability to be low.
On the other hand, we can find some industries where they’re generating incredible returns on invested capital year after year. The first important factor to remember is industries vary widely in their profitability.
The industry you’re in matters a great deal
Sometimes there are forces beyond your control driving your profitability. So if you’re in the newspaper business today as the web continues to grow, no matter how smart your strategy and how capable your management team, your profitability is being driven in large part by greater forces beyond your firm at the industry level.
Competitive advantage is fleeting
If we look at which industries are really profitable today and then look 5, or 10, or 20 years ago, we see the industry structure tends to be much more stable. Is the industry one where a only a few firms dominate? That structure tends to be more stable, but is also apt to change quickly, along with your company’s competitive advantage.
Learn more about industry structure and competitive advantage
Industry structure varies widely around the world
We don’t have situations where industries look identical in every country. Yes we live in a more global world, and yet industries that look very fragmented in one country may be highly consolidated in others. Be careful when people talk about a global industry.
Global trade does occur, but industries in competitive environments can look very different in different parts of the world for a variety of reasons, stretching from consumer tastes and culture, to government regulation and institutions, and even forms of government.
Common Questions About Maintaining a Healthy Company
In order to effectively maintain a company, you should trust your employees to do their job correctly, have a plan but be flexible, and keep up with changing times.
To be successful in business, you must recognize that your business is constantly evolving. Also, it is not just about you but about delivering value to your customers.
To successfully run a small business, you should have a solid plan, don’t borrow too much money from others, put everything in writing, and employ a skilled team.
You can improve your business’s performance by keeping track of your numbers (money spent and profits), being aware of trends in your industry, and incentivizing your staff members to put in their best effort.