Anne Mulcahy was the new CEO for Xerox, a company in deep trouble. A Texas customer advised her that turning the company around was simple. All she had to do was (paraphrased), ‘first get the cow of the ditch, then understand how she got there and then make sure she never gets stuck there again’.
That’s how the most enduring companies have survived 200+ years. They kept getting their cow out of the ditch. Again and again.
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In my previous newslehttps://performonks.com/what-makes-stuff-durable, I discussed that the Lindy effect uses the rear view mirror to forecast longevity.
How can we use Lindy effect to forecast future longevity? By distilling what has worked in the past.
To be considered durable, a company should have been in operation for 200 uninterrupted years or more since its formation. I study a cross section of 100-700 year old companies and find that the most durable companies are obsessively traditional, and radically innovative – both at the same time. Buckle up. This is a long one.
TL:DR
- Birth: the most enduring companies were born because of context, colonization. And Japan.
- Continuation: Bi-centennials continued to thrive because they diversified, managed succession and put purpose above profit.
- Revival: At risk companies revive because of strong leadership and creative destruction.
- New companies are ‘idea’ based, and can prolong their lifespan by mimicking old ones – digital-physical assets, scaling network effects and creative destruction
1.Birth: the most enduring companies were born because of context, colonization. And Japan.
As per Wikipedia, 61 companies were formed as early as 1300s and are still in operation. 23 of these are from Japan.
As of 2008, there were 5,586 companies older than 200 years across 41 countries. 56% (3,128) were in Japan (Source: Bank of Korea). It’s also no surprise that more than 33,000 businesses in Japan are over a 100 years old.
It feels natural that Japan would have the most long lasting businesses, given its unique culture. As an island nation, it has been relatively isolated and resource scarce. This has led to a culture of preserving tradition and long-term thinking. They believe in making the most of what they have for as long as possible, and this manifests in the nurturance of local businesses.
Timeless needs: All 61 companies formed in 1300s are in the business of fulfilling basic needs. Food and drink. And operate in fundamental industries like mining, foundry, salt and construction.
“The oldest family businesses often are involved in basic human activities: drink, shipping, construction, food, guns.”
William O’Hara, author of Centuries of Success
Due to our colonial past, India does not have any 200-year old companies. But it has five that are 150-years old. Check them out here. All five were started by or in association with East India Company in areas that benefitted Britain. Textiles, Finance, Ships, and Trade. These companies continued post independence because they diversified and managed succession wisely.
2. Continuation: Bi-centennials continued to thrive because they diversified, managed succession and put purpose above profit.
2.1 Diversification
A sure-shot way to de-risk tenure is by diversifying across multiple businesses. India’s Wadia Group started in 1736 as a ship maker. Today it is active in aviation, healthcare, chemicals, and even owns a cricket team.
P&G was formed in 1837 to make soap and candles. In 1955, P&G stood at No. 27 on the Fortune 500. In 2022, it is No. 47. It has managed to create multiple flywheels of growth beyond soaps to air fresheners, diapers, detergents etc. All within its core purpose of making everyday life better.
Amazon does both – fulfils fundamental needs, and diversifies: When Jeff Bezos saw that the internet was growing at 2,300%, he left his analyst job at D.E.Shaw to start Amazon. He was clear the business would sustain because it fulfilled always in-demand needs of vast selection, lower prices and fast delivery.
“It is difficult for us to imagine that ten years from now, customers will want higher prices, less selection, or slower delivery. Our belief in the durability of these pillars gives us the confidence required to invest in strengthening them.”
Jeff Bezos
While it started with fundamental needs, today Amazon has diversified into multiple businesses – AWS, Kindle, Subscription Video, Audible, Ads business and so on.
2.2 They keep it in the ‘family’
There is a moral burden to continue the family business. Each generation in Japanese firms thinks of itself as a player in a relay race that’s been going on for centuries and does not want to go down in annals of history as the one who dropped the baton.
A 10-foot-long 17th-century scroll traces all of Kongo Gumi’s (the oldest company in the world) previous owners. Succession is carefully planned and the best suited heir is entrusted with the reigns when he is ready (sadly, gender bias prevails here too).
However, the heir is not always decided by birth. Succession is meritocratic. In case the eldest son is not found up to the task, the family adopts a son who marries into the family. A 2011 study found businesses run by adopted heirs consistently outperformed those run by blood heirs.
“You can’t choose your sons, but you can choose your sons-in-law,”
Japanese saying
HBR studied seven 100-yr old companies. Leaders in these companies stayed at the helm for 10+ years, against the industry average tenure of 5 years. These companies did not just maintain stable leadership at the top, but also two or three levels down. They planned succession as many as four years in advance and spent at least one year handing over.
2.3 They don’t chase profits, they chase purpose
All enduring companies think 20-30 years out, and they also have an audacious vision to shape society, and not just their bottom-line.
The vision of the Royal College of Art is to change the world through art and design. Their alumni include “the Head of Design at every car manufacturer in the world, apart from BMW, 8 of Apple’s 18 product designers and at least one designer in every Paris fashion house.”
During the Tsunami of 2011, many Japanese companies helped the local community at considerable cost. One of these was Lawson department stores. Self interest dictated that they focus their efforts in Tokyo, where most of their stores were. But instead, they funded relief work in areas of maximum devastation. The best part of the story is how purpose had percolated to each employee. Lawson was donating school lunches before regular meal programs resumed. Towards this, Lawson employees contributed personal funds to add dessert to the meals.
The Tata group in India is revered for its commitment to community building and employee welfare. After the Taj hotel terrorist bombing, the group supported families of deceased hotel employees with lifetime salaries. And this is just one of millions of acts of kindness from the Tata group that will go unannounced by the group but will wedge themselves into memories of beneficiaries.
Patagonia’s reason for existence is the planet itself. We all know its founder gave away the company to fight climate change.
3. Revival: At risk companies revive because of strong leadership and creative destruction.
3.1 creative destruction
Once their core of vision and line of succession is secure, durable firms continue to disrupt themselves to stay relevant. Even some of the oldest Japanese companies have survived to this day, because they are not precious about the line of business they are in. Instead, their obsession with survival has kept them agile enough to evolve their business over time.
- Nintendo started in 1889 as a paying cards manufacturer. It kept disrupting its own core business and today, is a gaming company. What it did not waver from, was its core purpose – “how to create fun”.
- A kimono manufacturer dating back to 1688, Hosoo, has expanded into carbon fiber production, while staying true to the core of “3-D weaving”.
- NBK, a materials firm started off making iron kettles in 1560, is now producing high-tech machine parts. Again staying true to core competence of “iron foundry”.
3.2 Strong leadership during adversity
Xerox (Formed in 1906) was all but dead. Anne Mulcahy revived it. In doing so, she demonstrated some of the mental models of enduring companies. She was a company insider and had grown through the ranks. So she knew the nuts and bolts of the business. She had a long-term view and believe that quarterly earnings pressurized CEOs to cut corners and lose long-term focus. She is quoted to have said, “I applaud companies that have pulled back from setting earnings expectations and are trying to reshape the rules of the road. If I could take Xerox private, I’d do it yesterday.” She believed in the power of creative destruction – she shut down undifferentiated divisions like inkjet printers, funded the R&D department so it became a revenue generator, and changed the organization structure to drive direct accountability.
Sometimes leadership creates adversity. Walmart and Ames were retail contemporaries. A leadership misstep shortened Ames’ lifespan. Ames hired an outsider CEO who deviated from the strategy of everyday low prices and wanted to grow much faster. He acquired a company (Zayre) to launch urban retail stores. Whereas Wal-Mart hired an insider CEO and continued to grow slowly and organically.
4. New companies are ‘idea’ based, and can prolong their lifespan by mimicking old ones
Only 52 companies have been on Fortune 500 continuously since 1955 until 2021. All the new Fortune 500 companies are technology based companies like Apple, Amazon, Microsoft, Google etc.
Prof. Govindarajan, from Dartmouth, researched 29,000+ new companies and found that company life spans are falling. New companies are idea, algorithm and technology based, so are easier and cheaper to start and scale. This also makes them vulnerable to being disrupted.
On the other hand, bi-centennials enjoy moats of physical assets – factories, distribution infrastructure, foundries, oil refineries, or mines. They take time and investments to scale and this leads to longevity.
“Creative destruction has always been a force to be reckoned with, but in the physical world, the cycles were longer. In the technology-based sectors, the cycles have accelerated.”
Prof. Govindarajan
The research recommends three ways in which new companies can mimic old ones to prolong lifespans.
4.1 Digital-physical hybrid offerings
Interlock physical products into the suite of offerings to gain entry barriers because a business built on pure intellectual capital is vulnerable to me-too offerings. Tesla (production, battery charging stations) and Amazon (warehouses, logistics) are strong examples of digital-physical moats.
4.2 Scale network effects
Just like old businesses have a purpose to the community, if a new age company has network effects going for it, it will endure. On strong example here is the UPI payments platform in India, that is building network effects between bank accounts and a series of utilities.
4.3 Creative destruction
1 year of a new company is equal to 2 years of an old company, due to the pace of advancement. Since new companies are founded on the power of tech and ideas, important for them to continuously innovate.
4.4.And don’t forget to keep getting that cow out
Prof. Govindarajan also mentioned the criticality for new companies to focus on the long-term, just like the bi-centennials. He says, “People blame Wall Street for this pressure, but in fact Wall Street demands that you look for a healthy balance between the short term and the long term,” he says. “Otherwise you’re not going to be there after the short term.”
At the end, it all comes down to focusing on what can be controlled – getting the cow out of the ditch and walking on.
It doesn’t matter what lens we look through—the lens of those that go from good to great, the lens of zero to great in exciting new industries, or the lens of those that prevail in adversity and last 100 years—one lesson stands out: Whether you prevail or fail, endure or die—whether you make it onto the Fortune 500 and whether you stay there—depends more on what you do to yourself than on what the world does to you.
