Like human beings, businesses do not survive for ever. They don’t seem to have a maximum life and some have been going for hundreds of year – but their average life is probably much less that a normal human life, writes Professor Simon Bridge.
One way of looking at business life is indicated by Geoffrey West in his book Scale. In it he reports that a sample of US publicly traded companies had a half-life of about ten and a half years – which means that half of them would cease to exist during the next 10.5 years and half of the remainder after another 10.5 years. Therefore only a very few would survive for 100 years and virtually none for 200 years.
He admits that this is based on one sample but a study of the Chinese stock market found a similar scaling pattern. Although West’s sample was of businesses large enough for a stock market listing and most businesses are actually much smaller, those smaller ones also have a high turnover rate. For example I started a business, essentially as a sole trader, when I left full-time employment and closed it later when my pensions matured and I no longer needed the business income. So in that case the life of the business was 20 years and, as my aims for the business were to maintain an income, to make a contribution and the enjoy it, I think it succeeded and its closure was not a ‘failure’.
So, if businesses often have a short life, why, West asks, do some businesses survive for hundreds of years? One clue is that the long-term survivors are of modest size and appear to have found a niche in a speciality market which they serve well and have not tried to grow beyond that. Indeed West suggests that continually trying to grow can actually reduce the life of a business if it becomes dependent on a volatile market which is likely to change its technology or its tastes.
Businesses might be part of our life – but should they rule it and take precedence over other considerations? Do we tend to subscribe to a conventional wisdom that businesses should try to grow to maximise their income and that they only close because they fail. Should we instead see them as devices to help us realise our goals – which may be income, but not necessarily always more income, and may also include other things such as a sense of achievement and contribution, of independence and of convenience? And, as devices, they can find that they are no longer needed or have been superseded.
