WE are told that the average life span of a big company is 40 years. But recent events, not only in Malaysia but also the world over, tell us that it is much shorter for most companies, big or small.
A recent study placed the figure at 12.5 years for companies in Japan and Europe, regardless of size. If we consider dot-com companies that came and went in recent years, the average life span will be in single digit.
This contrasts greatly with the fact that Stora, a Swedish company established in 1288, has survived for 700 years. The paper, pulp and chemical manufacturer began life as a copper mine, according to Arie de Geus, author of The Living Company.
What determines the success of companies today?
Given the competitive environment, it is obvious that companies need to do more than survive. It must be able to sustain whatever business it is in. Growth per se is not enough. Consistent and sustainable profitability is a more effective measure of performance and long-term success.
According to Michael E. Porter, master of competitive strategy who was in Kuala Lumpur recently, companies must compete in order to achieve sustainability.
And to compete, they must have a strategy, which is not the same as wishing to be number one or even being good in what they do. The former is only a vision; the latter translates merely into operational effectiveness.
Operational effectiveness alone, according to Porter, is not enough either because it only assures you of short-term success. To Porter, operational effectiveness is trying to run the “same” race faster.
To have long-term success, you must choose to run a “different” race. And that is strategy – a strategy to compete on something distinctively different from others. This will create a unique and sustainable competitive position for your business, says Porter.
What exactly is a strategy?
According to Porter, a strategy is:
z A unique value proposition versus competitors.
z A different, tailored value chain.
z Clear trade-offs, and choosing what NOT to do.
z Activities that fit together and reinforce each other.
z Continuity of position with continual improvement in realising it.
What is not a strategy?
Porter says a strategy is not: Best practice improvement; Aspirations; A vision; Learning; Agility; Flexibility; Innovation; The Internet or any technology; Restructuring; Mergers/ Consolidation; or Alliances/Partnership.
Businesses are reminded to have both: operational effectiveness and strategy. This is the single most important lesson for management.
“Unless you’re good at operational effectiveness, strategy doesn’t matter,” says Porter.
“The problem with many companies is that all they do is pursue best practices. It is very hard to win, because everybody is doing the same thing. It’s hard to stay ahead because your competitors are getting better too.”
Companies that wish to have long-term profitability must move to the next stage. In simple terms, they must rethink their way of competing.
Porter shares five fundamental changes that companies today must understand.
First, the period of easy growth is over. It is true for Malaysia, as well as for many parts of the world.
Second, low wages no longer give competitive advantage to businesses in Malaysia. Although Malaysia has a higher GDP per capita than many low-cost countries, its compounded annual growth rate (CAGR) of GDP per capita is lower than that of emerging economies.
Relative to the US, in figures based on the World Development Indicators 2002, Malaysia’s CAGR of GDP per capita for 2001 was a significant five to six percentage points lower than that of China, which really had a much lower GDP than Malaysia.
On this score alone, it only suggests that Malaysian businesses are losing out to businesses in China and certainly cannot rely on low wages or low cost as a competitive advantage.
In the meantime, the labour productivity performance is not growing in tandem with Malaysian prosperity. Over the period 1995-2000, Malaysia’s labour productivity growth was just about average among Asian economies, lagging behind the more dynamic economies like Singapore and Taiwan.
Third, open trade is on the way, if not already here. Despite attempts to slow the tide of globalisation and its impact on developing and less developed economies, the effects have already been felt.
And it cuts across all industries. Many without a competitive strategy will find themselves unable to compete under such market conditions. Eventually, it will sound the death knell for these companies.
Fourth, businesses need to appreciate that government distortions in industry competition are getting less. These distortions have to do with the role of the government in industry – specifically government policy that impacts the industry structure, which is made up of a complex interplay of market forces and rivalry among existing competitors.
Evidently, removal of government distortions can lead to radical shifts in the structure and profitability of businesses.
Fifth, corporate governance is getting more open. Companies are becoming more accountable to investors; they no longer can hide the results – financial, economic or otherwise – from the investing public.
Business leaders must understand all these changes that are taking place. Only then will they be able to know what competitive advantage they have and then be in a better position to decide how they are going to compete and ensure long-term success.
And then maybe we’ll see more companies lasting beyond their average 40 years.