Resilient and agile companies are likely to be the most innovative

Research reveals the number one reason for large business failure over time is the inability to innovate.

While it’s evident that several listed companies will not survive the COVID-19 pandemic — case in point being 102-year-old American car rental company Hertz filing for bankruptcy in May, history shows that dismal economic growth isn’t necessarily the death knell for good companies. Rather, it is their inability to innovate.

This is according to Andrew Dittberner, Chief Investment Officer at Old Mutual Wealth Private Client Securities, who says that while there is naturally a direct relationship between business performance and economic growth, a booming economy doesn’t alone explain the success of some of the oldest companies in the world.

“We know that an economic tailwind alone is not enough to ensure survival. If this were to be the case, all businesses would flourish in economic expansions and retire to the graveyard when a recession hits,” says Dittberner.

Instead, research shows that the inability of successful companies to remain leaders in their field is often correlated to a failure to change with the times.

Citing the Fortune 500 list of the largest US companies — a list that dates back to 1955, only 53 companies of the original 500 are still on that list today. “A similar study by Innosight showed that the average tenure of companies in the S&P500 Index has fallen from 33 years in 1965 to 20 years in 1990. This is expected to narrow even further to 14 years by 2026,” Dittberner says.

“This clearly shows that it’s incredibly hard for a business to survive at the top of its game, and yet doing so is the single best indicator of an exceptional business.”

However, investors can’t wait for 50 years to identify the best companies to hold in their portfolio. According to Dittberner, after length of time in business, the second best indicator of a genuinely innovative company is their ability to be, what he terms, agile and absorptive.

“Agility is more intuitive and speaks to a company’s ability to spot an opportunity and exploit it before their opponent(s),” says Dittberner.

He says that Kodak is the perfect example of a company unable to see an opportunity and run with it. “The company famously invented the digital camera but wasn’t agile enough to seize the opportunity. In 2012, the 130-year old company filed for bankruptcy protection, from which it has subsequently emerged,” says Dittberner.

Absorption shows a company’s ability to bounce back from setbacks. “Businesses can foster absorption in a number of ways, such as diversified cash flows, significant cash reserves, high customer switching costs, low operational/fixed costs, loyal customers and a powerful brand,” he explains.

According to Dittberner, Microsoft is an excellent example of a company that maintains loyal customers partly due to high switching costs. “Because of this, it’s been able to expand into new opportunities like gaming, cloud computing and video conferencing, displaying how absorption can drive agility,” says Dittberner.

Absorption is often viewed as a characteristic of larger, established businesses that are able to defend their turf. However, he cautions, that size is not necessarily a good measure of the ability to ride out economic shocks. “The ‘too big to fail’ fallacy, is just that — a misconception. Given the context of a global economy on its heels, even the most robust businesses would never have faced a sterner test than today,” says Dittberner.

In every place, disruption is a reality and although the economy can help, it is critical that a business remains relevant, resilient and resolved. Change is occurring rapidly and with it, many new businesses are being born, while others head into the twilight zone of retirement as they fail to adapt and evolve to new technology and changing consumer patterns.

“There are many great businesses that have stood the test of time; however, never would they have faced a sterner test than today. It is more necessary than ever in today’s highly competitive world for businesses to develop the ability to absorb times of stress while maintaining the agility to make the right moves at the right times,” concludes Dittberner.