The lifecycle of businesses

[pbrower2a]

(10-11-2018, 11:59 AM)David Horn Wrote:

(07-03-2018, 10:41 AM)pbrower2a Wrote: ... I think that we can see a once-venerable company headed into a death spiral. It makes bad, desperate decisions that work out badly.  Some of these mergers suggest an aging tiger eating a healthy young lamb and expecting rejuvenation from the meal. The tiger is getting nothing more than a meal; it won't gain any vitality. The lamb of course is no more. 

The era of shareholder value being the sole driving force in business has been an unmitigated disaster.  Until it's resolved, more of this will go on until we cannibalize our entire economy to benefit the very, very few.  It's 40 years and counting already.  Even allowing for the massive wealth and power of our corporate community, it can't continue forever.

Such has been an assumption with joint-stock companies since DuPont Corporation first went into business over 200 years ago. This is the oldest business in America that was born a giant business, largely as a government contractor to supply munitions for the armed forces of the fledgling United States of America. What is good for profit is good, and executives know this well. When the funds are flowing well, such makes growth more important and liquidity less precious. When profits start to shrink, then liquidity is everything. That is the distinction between a 'growth' stock and an 'income' stock. 'Growth' stocks typically represent relatively new firms, and 'income' stocks are more likely a few decades away from the end of the line if they do not have captive markets. 

It is easy to see giant businesses as models of efficiency, but the Adizes model suggests that efficiency decreases as a company gets larger, needs more internal controls, and is responsible to shareholders who scream bloody murder if earnings per share shrink. Figure instead that a mom-and-pop business has adequate controls (a family owner running the cash register is nearly ideal if that family member has no cause [such as a drug habit or a proclivity for conspicuous consumption] for filching the money). If it can save money on office supplies... well, it doesn;t have much of an office and has no dedicated office staff, anyway).  

OK, no company makes a profit off its internal accounting or its personnel department, but it might develop more and better products or streamline operations if it has a solid engineering department, and can get a larger sales volume with more effective marketing. Fine -- but with that comes more bureaucracy. Bureaucracy loads costs without generating revenue or developing new products. It is practically impossible to determine what bureaucrats are doing real good and which ones are not doing real good. Efficiency in doing long-term damage can look like a virtue.

Small business does not have a bureaucracy because it cannot afford one. It typically has other problems like limited revenue and a capricious cash flow. 

... So how does this relate to generational theory? Optimally the economy is seeing small businesses form at all times, with some of them becoming big businesses, and the lean operators taking over for the high-cost operators as the latter find their costs catch up to revenues.   Many companies have a natural lifecycle of the sort that can reward young, energetic workers who latch onto them in the go-go phase to find themselves with responsibilities that grow with their increasing competence and become more bureaucratic as the original employees become less flexible and imaginative in their 40's and 50's and maybe have some profits with which to fund pensions for retirees. Had I had a choice between Hewlett-Packard around 1980 or Sears I would have definitely chosen Hewlett-Packard. To be sure there are companies that die due to incompetence, poor decisions (Braniff Airways), or even malfeasance (Enrob Corporation, as I love to call it), but most fail due to irrelevance. I remember someone talking about the demise of Montgomery-Ward on a news program... only to make the question "when did you last shop there?"

From the standpoint of tax revenues for state and federal governmentsneither infant entities nor dying entities generate much revenue through income, sales, or payroll taxes. Go-go companies may be starting to churn revenue, but they are also buying equipment and buildings suited to rapid depreciation of sunk costs.  Companies in the prime and "fall" companies are generating maximal profits, have their peaks in sales volumes, and their highest payrolls in relative terms,. Aristocratic companies are living off past glory, but for them the taxes are becoming a real burden. In bureaucracy, costs are rising faster than revenues, and taxes are becoming a crippling burden, real sales volume is shrinking in contrast to the glory days, and payrolls are shrinking. A company may be resorting to debt service to keep it afloat, and debt service becomes a cost that does nothing but fend off the inevitable. 

If many companies are in the death spiral of the recrimination (when things are starting to fall apart) and bureaucratic stage, but few are going from go-go into maturity... then just think of how messed-up the overall economy can be.