Business Life: Nothing lasts forever
First published in Business Life, September 2009
The great economist, Alfred Marshall, came to believe that industrial titans were all but immortal: they “often stagnate, but do not readily die.” That seems sensible. Some companies do seem to last forever. The most valuable companies of 1912, just two years after Marshall wrote those words, included Procter and Gamble, General Electric, and Shell. All three companies not only survived but prospered. Procter and Gamble was the 52nd most valuable company in the world. General Electric was the seventh most valuable, and Shell the fifth. By 1995, according to data collected by the economic historian Leslie Hannah, all three companies had risen up the ranks, and were the tenth, second and most valuable companies in the world.
That might not seem surprising: it was what Marshall expected. But looking closer, was he really correct?
The world’s most valuable company in 1912 was US Steel, a gigantic corporation even by today’s standards, employing 221,000 workers. This was a company with everything going for it: it was the market leader in the world’s leading economy, in an industry that never became obsolete. US Steel even had luck on its side, dodging a bullet when Standard Oil and Du Pont were broken up by the US government in 1911. And yet over time US Steel disappeared completely from list of the most valuable 100 global companies; last year it was not even in the top 500.
Third on the list in 1912 was the British company J&P Coats, which was acquired by Viyella in 1986 and which has dropped out of the top 100. Next was Pullman, bought out by Wheelabrator-Frye in 1980. Other top ten companies included Anaconda, Singer, American Tobacco (now American Brands), and International Harvester. None made the top 100 in 1995.
While Pullman suffered from being in a declining industry, others seemed to limp into obscurity for no obvious reason. If General Electric was such a star, why did its old rival Westinghouse Electric not keep up? If Procter and Gamble flourished in fast-moving consumer goods, what happened to Cudahy Packing?
Ten of Hannah’s top 100 vanished inside a decade. Over half disappeared over the next 83 years, and just 19 retained their position in the top 100. In fast-growing new industries, too, from the dot-coms to the early auto industry and even the 15th century printing industry, most firms disappear.
The paradox of the marketplace is that it delivers prosperity despite endemic failure – in fact, I would say, because of endemic failure. Many of the titans of 1912 failed because they were replaced by something better.
That is one reason why the financial crisis has posed such a challenge to the idea that markets work well. We are now told that banks are “too big to fail”. That may well be true, but if so, it is a big departure from the lessons of the past.