The failure of so many large, well-known companies over the past year has reminded us that long-term business success is more difficult than most people realize. I know that when I started my business career 34 years ago, I went to a large Chicago law firm that seemed like it had been, and would continue to be, around forever. Within the next few decades, that firm, and many others like it, would be gone, a casualty of a much more ferociously competitive world in private legal practice.
If we look at the Fortune 500 list, 30% of the companies on the list that was published in May, 1996, the month I became CEO, are gone. Since the list was first published in May, 1955, 1,300 companies have come and gone from the list.
Why is this so? I believe that there are many reasons, but the biggest one is that a business that discovers and takes advantage of a market opportunity is inherently sowing the seeds of its own destruction the more success it achieves
When a business is exceptionally successful, others want to copy it, or figure out how to capture more of the benefits of its success for themselves. Competitors find a way to take a portion of the profits for themselves. When customers see that a business is exceptionally profitable, they are more likely to demand large discounts if they have the power to do so. Employees demand higher wages, salaries, and benefits because they have contributed to the enterprise’s success. Governments try to raise taxes on the successful business. Communities try to solicit more charitable contributions. Sometimes, antitrust and competition law proceedings are initiated, and government attempts to figure out if the business has used inappropriate or illegal tactics to be successful. In effect, a situation of large and growing profits is inherently unsustainable.
However, long before a business achieves phenomenal profit levels, the business usually hits a point at which the profitable customer market gets fully exploited. The remainder of the market is found to be unprofitable. At that point, the business has to explore and grow another market, and success in that task is very low probability.
Several years ago, I cam across a number of studies by organizations such as the Corporate Strategy Board, Bain, and McKinsey, which demonstrated that the odds of a well-established, mature, low-growth business successfully increasing growth in other businesses are very low. Success in one market does not predict success in others.
Ian Morrison, formerly president of the Institute for the Future, and a brilliant futurist, wrote a book called The Second Curve, in which he concludes that businesses which want long-term survival need to be developing the second wave of successful market development before the growth curve on the first wave declines. At the same time, Clayton Christiansen, in his brilliant book The Innovator’s Dilemma, points out that it is extremely difficult for any business to direct investment funds away from a successful and growing business into more speculative businesses, especially in a public company environment in which quarterly profit demands by shareholders are so powerful.
What tends to happen is that a new competitor, unconstrained by prior success, can develop the new market more easily than an established competitor in another market, even though the established company typically has far more resources to deploy in the new space.
I admire and applaud companies like Pitney Bowes which have had the ability to reinvent themselves decade after decade and find new ways to keep going and growing. I believe that one of the reasons Pitney Bowes has succeeded is that we have followed Andy Grove’s advice from his wonderful book Only the Paranoid Survive. Because our survival has been threatened so many times by proposed legislation, Justice Department investigations and private antitrust lawsuits, postal authority decisions, and the persistent perception that mail was a dying medium, we have been in a state of high alert to look continuously for the next big market opportunity.
While we have not always succeeded, we have not had the luxury of accumulating large profits in a single market and ignoring the threats to those profits. We have been resilient and resourceful, as well as innovative. Our history clearly has many examples of failed efforts to expand into new markets, some of which happened on my watch, but we have never gotten too comfortable with where we are.