All organisms in nature follow a clear path from birth to growth to maturity to old age and finally to death. Interestingly, businesses are the same way. The same graph that charts the numbers of bacteria in a colony over time – called a ‘bell curve’ for its distinctive shape describing the outline of a classic bell – is the same as a graph showing the revenues or market share of a company over time.
Reading the curve from left to right, there’s a slow ramp up to growth, then the curve steepens as everything comes together and the company grows rapidly in a phase that might be likened to adolescence. After that, things slow down, the curve flattens as revenues or market share peak out, then declines in a long tail to old age and finally death as the company loses its market over time.
This pattern of development applies to every business out there. With some, the process is more rapid than others, but the rules still apply. Nothing lasts forever. Just ask Rick Waggoner, the CEO of General Motors who is coping with GM’s long, slow decline. GM is no different than any other business. But 40 years ago who would ever have thought that GM could stumble and fall? Those were the good old days of teenage infallibility. Today, there’s a growing number of people who think GM can’t survive, burdened as they are with out of date union relationships, outmoded vehicle styles and high health care costs. It all seems like too much to fix. Bankruptcy might stall the inevitable end, but the downward trend over time is clear.
Airlines are a good example. With a few exceptions, the rule of thumb is that the only place to make money in the airline business is in the early phases when the company is growing and employee costs are low. When health care and retirement costs kick in later on in the corporate life cycle, it’s almost too much to bear, and airlines either go out of business (TWA) or go through bankruptcy (United,
Delta) and shed prior obligations to employees or both. The bankruptcy process allows companies to shed their financial skin so to speak, emerging at the end of this painful process as an almost entirely new business. The way bankruptcy is applied to the airline industry, the losers are the current employees and the competitor airlines which don’t go through bankruptcy, honor their commitments to employees and try to compete with their old cost structure (American Airlines).
What’s this got to do with the ISO business? It’s important to ask where we as an industry are on the lifecycle curve. Are we a young, dynamic, growing business? Or are we slowing down, showing more characteristics of middle age? Or, are we declining, headed for the end?
The characteristics of a growth industry are basic things like high demand for the product, fat margins, a high percentage of young employees, and in general, a low average age of each company in the industry. Often, in adolescent businesses, there is a lack of government presence in the form of regulation, specific taxation rules, etc. The financial players in the business tend to be risk- oriented types like venture capital companies, rather than banks. The businesses in an adolescent industry are usually strapped for cash because they are growing so fast that every dollar of profit goes back into the business to support growth.
The characteristics of a mature industry are the opposite. Typically, the companies in the industry are not growing at a rapid or even measurable rate.
The industry employees are older. Companies have thinning margins and often excess cash. The financial players in the business change from being risk- oriented venture capital types to return-oriented banker types. Companies in mature industries consolidate through acquisition to achieve growth.
It’s important for each of us in the acquiring business to have a sense of where we are on the life cycle curve as an industry.
Overall, the trends in the market will matter to us individually.
More than that, it’s important for each of us to make sure that the strategy we are pursuing for our company is in accordance with the environment. A good strategy takes advantage of the overall environmental conditions and doesn’t fight them. If your market is in the adolescent phase, then an adolescent company with an adolescent financial structure is appropriate. Likewise, if you see your market showing signs of maturity, then a company orientation that accepts and profits from industry maturity is appropriate.
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