Why do some companies last centuries while others barely make it a full year before calling it quits? This isn’t an easy question to answer, but it’s also a question that’s receiving more attention than ever.

Why?

Because companies are failing faster today than they did only a few decades ago. According to a Dartmouth study, conducted by professor Vijay Govindarajan and Anup Srivastava, Fortune 500 and S&P 500 firms listed on the stock exchange before 1970 had a 92% chance of surviving the next five years, while companies listed from 2000 to 2009 only had a 63% chance of surviving. This downward trend isn’t likely to stop anytime soon.

What is corporate longevity?

Before we diagnose the problem, it’s worthwhile to understand the question. Corporate or organizational longevity studies the factors that contribute to the sustainability of organizations, so they remain in operation over the long term. ‘How long’ is a relative measure that depends on the industry the company operates in; for example, companies that operate in banking or insurance tend to last decades to centuries on average, while the average tech or fashion company may last a handful of years or decades if they’re lucky.

Why corporate longevity matters

Blockbuster, Nokia, Blackberry, Sears—at one time, these companies innovated their way to become the giants of their respective sectors. Today, the individual circumstances of their demise have become business school cautionary tales, but often, these tales leave out why the failure of these companies is so devastating.

Besides the financial damage to individual shareholders, when a company implodes, especially large corporations, the wreckage they leave behind in the form of stunted careers, lost know-how, broken consumer and supplier relationships, and mothballed physical assets represent a colossal waste of resources that society may never recover.

Designing a company that lasts

Corporate longevity is a product of a large set of factors both within the company’s control and otherwise. These are factors Quantumrun analysts have identified after years of researching the best practices of a range of companies over a range of sectors.

We use these factors when comprising our annual company ranking reports and we use it for the Corporate Longevity Assessment service outlined above. But for the benefit of you, the reader, we’ve summarized the factors into a list, starting with factors that companies have little control over to factors that companies can actively influence AND from factors applicable mostly to larger companies to factors applicable to even the smallest startup.

* To begin, companies need to assess their exposure to corporate longevity factors that are heavily influenced by the governments they operate under. These factors include:

Government control

What is the level of government control (regulation) the company’s operations are subjected to? Companies that operate in heavily regulated industries tend to be more insulated from disruption since the barriers to entry (in terms of costs and regulatory approval) are prohibitively high for new entrants. An exception exists where competing companies operate in countries that lack significant regulatory burdens or oversight resources.

Political influence

Does the company invest heavily in government lobbying efforts in the country or countries where they base the majority of their operations? Companies with the wherewithal to lobby and successfully influence politicians with campaign contributions are more insulated from the disruption of outside trends or new entrants, as they can negotiate favorable regulations, taxes breaks, and other government-influenced benefits.

Domestic corruption

Is the company expected to participate in graft, pay bribes or show absolute political loyalty to stay in business? Related to the previous factor, companies that operate in environments where corruption is a necessary part of doing business are vulnerable to future extortion or government-sanctioned asset seizure.

Strategic industry

Does the company produce products or services deemed to be of significant strategic value to its home country government (ex. Military, aerospace, etc.)? Companies that are a strategic asset to their home country have an easier time securing loans, grants, subsidies, and bailouts in times of need.

Economic health of key markets

What is the economic health of the country or countries where the company generates more than 50% of its revenue? If the country or countries where the company generates more than 50% of its revenue are facing macroeconomic difficulties (often the result of government economic policies), it could adversely affect company sales.

* Next, we look at a company’s diversification structure or lack thereof. Just like any financial advisor will tell you to diversify your investment portfolio, a company needs to actively diversify where it operates and with whom it does business. (Of note, diversity of product/service is excluded from this list as we found that it had a marginal impact on longevity, a point we will cover in a separate report.)

Domestic employee distribution

Does the company employ a significant number of employees AND does it locate those employees across a large number of provinces/states/territories? Companies that employ thousands of employees across multiple provinces/states/territories within a particular country can more effectively lobby politicians from multiple jurisdictions to act collectively on its behalf, passing legislation favorable to its business survival.

Global presence

To what extent is the company generating a significant percentage of its revenues from overseas operations or sales? Companies that generate a significant percentage of their sales overseas tend to be more insulated from market shocks, given that their income flow is diversified.

Client diversification

How diversified is the company’s clientele, both in quantity and industry? Companies that serve a large number of paying customers are usually better able to adapt to market changes than companies dependent on a handful (or one) client.

* The next three factors involve a company’s investment in its innovation practices. These factors are usually more relevant to technology-intensive companies.

Annual R&D budget

What percentage of the company’s revenue is reinvested into the development of new products/services/business models? Companies that invest significant funds into their research and development programs (relative to their profits) usually enable a higher-than-average chance of creating significantly innovative products, services, and business models.

Number of patents

What is the total number of patents held by the company? The total number of patents a company owns acts as a historical measure of a company’s investment into R&D. A large number of patents acts as a moat, protecting the company from new entrants into its market.

Patent recency

Comparison of the number of patents granted over three years versus over the lifetime of the company. Accumulating patents on a consistent basis indicates that a company is actively innovating to stay ahead of competitors and trends.

* Related to the innovation investment factors, the next four factors assess the efficacy of a company’s innovation investments. Again, these factors are usually more relevant to technology-intensive companies.

New offering frequency

What is the number of new products, services, and business models launched within the past three years? (Significant improvements to existing products, services, and business models are accepted.) Releasing new offerings on a consistent basis indicates that a company is actively innovating to keep pace or stay ahead of competitors.

Cannibalization

Over the last five years, has the company replaced one of its profitable products or services with another offering that made the initial product or service obsolete? In other words, has the company worked to disrupt itself? When a company deliberately disrupts (or makes obsolete) its own product or service with a superior product or service, it helps fight off rival companies.

New offering market share

What percentage of the market does the company control for each new product/service/business model it released in the last three years, averaged together? Should the company’s new offering (s) claim a significant percentage of the offering’s category market share, then it indicates that the company’s innovation investments are of high quality and have a significant market fit with consumers. Innovation that consumers are willing to compliment with their dollars is a difficult benchmark for rivals to compete against or disrupt.

Percentage revenue from innovation

What is the percentage of company revenue generated from products, services, and business models launched within the last three years? This measure empirically and objectively measures the value of innovation within a company as a percentage of its total revenue. The higher the value, the more impactful the quality of innovation a company produces. A high value also indicates a company that can stay ahead of trends.

* A standout factor and the only one that relates to marketing includes:

Brand equity

Is the company’s brand recognizable among B2C or B2B consumers? Consumers are more willing to adopt/invest in new products, services, and business models from companies they are already familiar with.

* The next three factors focus on the financial factors that support corporate longevity. These are also factors that smaller organizations can easily influence as well.

Access to capital

How easily can a company gain access to the funds needed to invest in new initiatives? Companies that have easy access to capital can adapt more readily to marketplace shifts.

Funds in reserve

How much money does a company have in its reserve fund? Companies that have a significant amount of liquid capital in savings are more insulated from market shocks given that they have the funds to overcome short-term downturns and invest in disruptive technologies.

Financial liabilities

Is the company spending more on operations than it’s generating in revenue over a three-year period? As a rule, companies that spend more than they make cannot last for very long. The only exception to this rule is whether the company continues to have access to capital from investors or the market — a factor addressed separately.

* The next three factors revolve around a company’s management and human resource practices — factors that could potentially have the highest impact on longevity, are the cheapest factors to influence, but can also be the hardest factors to change.

Hiring for diverse minds

Does the company’s hiring practices emphasize the recruitment of a diverse range of perspectives? This factor does not advocate for perfect equality between genders, race, ethnicities, and religions across every division and level of the organization. Instead, this factor recognizes that companies benefit from a large base of intellectually diverse employees who can collectively apply their diverse range of perspectives toward a company’s day-to-day challenges and goals. (This hiring practice will indirectly lead to greater diversity in genders, race, ethnicities, without the need for artificial and discriminatory quota systems.)

Management

What is the level of managerial quality and competence leading the company? Experienced and adaptable management can more effectively lead a company through market transitions.

Innovation-friendly corporate culture

Does the company’s work culture actively promote a sense of intrapreneurialism? Companies that actively promote policies of innovation usually generate a higher-than-average level of creativity around the development of future products, services, and business models. These policies include: Setting visionary development goals; Carefully hiring and training employees who believe in the company’s innovation goals; Promoting internally and only those employees that best advocate for the company’s innovation goals; Encouraging active experimentation, but with a tolerance for failure in the process.

* The final factor in assessing corporate longevity involves the discipline of strategic foresight. This factor is difficult to spot internally, even with enough resources and a large employee base that can contribute a sufficient quantity of diverse insights. That’s why a company’s vulnerability to disruption is best assessed with the support of strategic foresight specialists, like those from Quantumrun Foresight.

Industry vulnerability to disruption

To what extent is the company’s business model, product, or service offerings vulnerable to emerging technological, scientific, cultural, and politically disruptive trends? If a company is operating within a field/industry that is primed for disruption, then it is vulnerable to being replaced by new entrants should it not take the proper precautions or make the necessary investments to innovate.

Overall, the key takeaway this list imparts is that the factors influencing corporate longevity are diverse and not always within an organization’s control. But by being aware of these factors, organizations can restructure themselves to actively avoid negative factors and redirect resources toward positive factors, thereby positioning themselves on the best possible footing to survive the next five, 10, 50, 100 years.

If your organization could benefit from enhancing its organizational longevity prospects, consider starting that process with an organizational longevity assessment from Quantumrun Foresight. Fill out the contact form below to schedule a consultation.