Survival is the Ultimate Performance Measure of a Business


#1

Survival

A great business is one that dominates and endures. I find that 99% of articles and books that study great businesses and leaders focus on the factors that lead to domination. Very little research is dedicated to endurance.

If I were to ask – What is the #1 characteristic of an exceptional business?

Many would say – The fastest growing companies.

Some would say – The company that earns the most money.

Others would say – The largest companies.

Few would say – The company that can endure over a long period of time. A company that survives.

Fortune Magazine has compiled its Fortune 500 list every year since 1955. The Fortune 500 list ranks the 500 largest corporations by total revenue in the United States. The list includes public and private companies.

When you look at the Fortune 500 companies from 1955, only 60 companies remain on the list.

In addition, the average lifespan of a Fortune 500 company in 1955 was 60 years. Today the average age of a Fortune 500 company is 18 years.

The lifespans of companies are shrinking.

In 1955, the Fortune 500 list was filled with companies like American Motors, Brown Shoe, Studabaker, Collins Radio, Detroit Steel, and others. These companies were the largest companies in the world. They are now gone. Wiped out. So it begs the question Why?

We look to Winston Churchill to tell us the answer.

Winston Churchill is known for being a British politician, stateman, army officer, and rather prolific writer. In fact, Churchill wrote 42 books and earned the 1953 Nobel Prize for Literature. John Rockefeller wanted Churchill to write his biography but Churchill’s price was too high [$250,000]. But Churchill is most famous for being the Prime Minister of the United Kingdom and leading the country through World War II.

If we look at the picture above – Churchill is young on the left on the right he is rather old. He lived to be 90 years old.

90 years is a long time, but what is fascinating is the time period he was born and the time period in which he died.

Winston Churchill was born in 1874, this was only nine years after the civil war ended.

In 1874, the year he was born, there was no electricity. No radio. No Television. No Telephones. There were no lightbulbs. Homes were still being lit by candle light and gas lights.

Winston Churchill died in 1965. Just think how different the world was in 1965.

By 1965, men had orbited the earth, walked in space, sent a probe to the surface of Venus. An automobile had already driven more than six hundred miles per hour. Nuclear power was being used.

It is rather remarkable to think about the amount of change that Churchill witnessed.

Everything changed.

This rate of change was something that was constantly on Churchill’s mind. Toward the end of his life Churchill said,

“I wonder often whether any other generation has seen such astounding revolutions of data and values as those through which we have lived. Scarcely anything material or established which I was brought up to believe was permanent and vital, has lasted. Everything I was sure or taught to be sure was impossible, has happened.”

Now I want you to think about that rate of change through the lens of a business.

How hard it must be to operate a business through that type of environment.

Think about the companies that have endured over a long period of time. Many of the products or services that originally launched their businesses aren’t even in demand anymore.

In 1939, Bill Hewlett and David Packard partnered up to launch Hewlett Packard. The product that launched the company was the Model 200A audio oscillator. They literally baked the paint on the first units in a kitchen oven. David’s wife said food never tasted the same. They priced the product at $54 when competing products were $200-600. Sales took off.

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I don’t think anyone is buying the Model 200A product today. The company evolved, innovated and adapted around their customer’s needs to become one the world’s largest electronic instrument manufacturers.

Other companies haven’t evolved fast enough.

In 2005, the Newspaper Industry was a $55 billion business. Today its $10 billion. An entire industry almost gone. In just 14 years.

The Internet has transformed and destroyed industries.

In the last five years, online retail sales as a percentage of total retail sales has gone from 5% to 10%.It doesn’t sound like a big jump but it has led to very material losses for brick and mortar retailers who didn’t adapt and pivot to digital channels quick enough. What is the result?

In 2017 - 21 US Retailers declared bankruptcy including Toys R Us, The Limited, and Payless.

In 2018 - 16 more US Retailers declared bankruptcy including Bon-Ton, Nine West, and Sears.

Evolve or die. To endure you need to adapt quicker than the competition.

People generally look at old companies through the wrong lens. When people think “old” they think slow, set in their ways, etc. They basically think of an old person. This is the wrong lens.

Old companies are often the most innovative and adaptive companies. They have focused on an area for a long time. Many old companies aren’t large companies. They are small to medium sized companies that focused initially on an area that they ultimately ended up dominating. They wouldn’t have survived 50-100+ years if they weren’t innovative and adaptive.

“It is not the strongest of the species that survives, nor the most intelligent that survives. It is the one that is most adaptable to change.” This quote attributed to Charles Darwin

Ian Davis, former managing director of the multi-national management consulting firm McKinsey & Company said, “In a very real sense, survival is the ultimate performance measure of a business.”

It is Japanese custom that the oldest son inherits all of the patriarch’s wealth, including titles to all businesses. If a business owner doesn’t have a son, it was also Japanese custom up until the 20th century, to adopt into the family a person they trust, often a son-in-law, to pass on the business. This is why most of the oldest companies in the world are Japanese companies. It is not unusual to see Japanese businesses that are “still in the family” operate for 100, 200, 500, even 1,000 years. Even the gaming company Nintendo is 129 years old.

Kongo Gumi is a Japanese company and its the oldest company still in operation in the world. The company was founded in 578 AD. The company builds and renovates Buddhist temples. It was actually still family run up until 2006. A family business for 1,400 years.

The Henokiens is an association of family owned companies that have operated for more than 200 years or more. There are 48 companies in this association from across the world. Member companies must meet four criteria:

  1. They have reached a minimum age of 200 years
  2. They are managed by a descendant of the founder
  3. The family still owns the company or is the majority shareholder
  4. They are in good financial health

I love this description on the Henokien’s Association website:

Henokiens Association members are an exception to the economic landscape. The specific characteristics of their respective backgrounds, the common values which unite them, such as respect for product quality and human relationships, know-how transmitted with passion from generation to generation and the continuous questioning of achievements, all these constitute a message of hope for all family businesses, especially those forming the economic and social fabric of the future.

Henokien companies are the businesses that Anthony Deden would love to own [Real Vision Interview/ Member Transcript].

A Henokien member company is Garbellotto S.p.A

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Garbellotto S.p.A was founded in 1775 and is the world leader in manufacturing of finely made casks, vats, and barrels for the wine industry. The most historic wineries in the world are its customers. The company employs 80 master-coopers and has an annual revenue of €15-20 million. The company is 8th generation family operated and owned.

Garbellotto is the largest and oldest company in the world dedicated to the production of wooden barrels. A cooper is a person trained in the art of making wooden casks, barrels, vats, and tubs from wood. The job of cooper is virtually non-existant except for Garbellotto and a few others. There are no schools that teach it. It is a craft that is passed down from generation to generation. Garbellotto is one of the last remaining employers of coopers and thus controls the skill and trade that is passed down to apprentices. It reminds us a bit of Steinway & Sons (the piano maker).

The company continues to grow and is quite innovative. You can learn more about the company in this case study.

Another Henokien member company is Catherineau.

Catherineau was founded in 1750, designs and manufacturers made-to-measure to interiors for aircraft and yachts. The company’s customers are the rich, famous, and powerful – mainly in France. The company employs 90 people and has annual sales of €10 million. From the start, the company has been controlled by its founder and heirs. It has been passed down through nine generations.

The company’s founder Pierre Catherineau began the company making cartwheels. Then in 1820, his son started a new business customizing scows. Scows are small sailing vessels. The business would evolve and grow from generation to generation. In the 1960’s the company ventured into Aeronautics and business aviation. In the 1980’s the company started innovating by patenting its own lightweight composites to reduce weight of its aircraft fittings.

Catherineau credits their success and endurance to the following values:

  1. Constantly reinventing their business to survive
  2. Constantly adapting to their environment
  3. Meeting and Exceeding customer requirements

You can learn more about this company in this case study.

Exceptional businesses dominate and endure. Not enough emphasis is put on survival and the character traits and belief systems that have stood the test of time. We hope at the very least this article has peaked your interest and has caused you to think differently about business and investing. We will dive into more areas around the aspect Survival in future Member Only Posts.

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#2

In short: if you want to unlock the fullest compounding out of your money 50 - 100+ years from now, you need to deploy it in a manner consistent with the enduring characteristics found in these long-lasting companies.

Biology has some great lessons too.

I’ve always found horseshoe crabs to be a great example. They have survived 3 of the Earth’s extinctions that have wiped out most of every other species. Certain characteristics have allowed them to endure, which I’ll write about eventually.


#3

“Nature and history do not agree with our conceptions of good and bad; they define good as that which survives, and bad as that which goes under.” - Will and Ariel Durant (The Lessons of History)

h/t https://www.valueinvestingworld.com/