Monday, January 25, 2016

Social scientists studying company mortality

An interesting paper popped up on one of the blogs I follow: The mortality of companies

Here's the abstract:

The firm is a fundamental economic unit of contemporary human societies. Studies on the general quantitative and statistical character of firms have produced mixed results regarding their lifespans and mortality. We examine a comprehensive database of more than 25 000 publicly traded North American companies, from 1950 to 2009, to derive the statistics of firm lifespans. Based on detailed survival analysis, we show that the mortality of publicly traded companies manifests an approximately constant hazard rate over long periods of observation. This regularity indicates that mortality rates are independent of a company's age. We show that the typical half-life of a publicly traded company is about a decade, regardless of business sector. Our results shed new light on the dynamics of births and deaths of publicly traded companies and identify some of the necessary ingredients of a general theory of firms.

Hmmm... So, the typical company seems to survive for about a decade, more or less?

That does indeed seem to match my experience, though I confess I thought it was the extreme rate of technological change in my little corner of the industrial world that had a lot to do with that.

I found this paragraph from the paper particularly interesting:

A third perspective suggests that mortality rates increase as companies age. This idea is based upon two related concepts: the first is liability of senescence, the idea that as companies age, they accumulate rules and stagnating relationships with consumers and input markets that render them less agile and that re-configuration is increasingly expensive [32]. Arguing instead for a liability of obsolescence, Sorenson & Stuart [33] suggest that environmental requirements change over time and that, although firms may improve in competence and efficiency with age by becoming more specialized, these specific adaptations also increase the companies’ risk to new kinds of external shocks that will inevitably beset them.

In my own experience, I've definitely seen that a company's relationships with its existing customers can make it a challenge to behave in different ways with new customers: "that's not the way we do things around here".

The net effect is that a company finds it hard to change direction, or even to evolve.

I'm not a social scientist, but the paper is interesting.

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