Better Governing Now » Dear Commissioners (February 2, 2014): Business enterprises are not meant to survive.


Dear Commissioners (February 2, 2014): Business enterprises are not meant to survive.


    The next time you discuss the pleas of local businessmen for taxpayer support of their endangered firms, please remember that businesses are not expected or meant to survive the competition of the market place. The job of entrepreneurs is to whole heartedly pursue the "creative destruction" of stale and outdated ways of serving the customer. Inefficient and failing businesses cannot hope to survive by asking for protection against innovation anymore than 200 hitters can stay in the line up by asking for 40 mph fast balls.

    Companies are created by entrepreneurs intent on satisfying the unserved or underserved wants of consumers. If the firm is successful then it will thrive, but eventually consumer desires shift (e.g., from buggy whips to spark plugs) or a new firm is able to better serve the market for existing goods and services (e.g., cell-phones replacing rotary dial telephones or merchandizing changing from mail order catalogue to shopping mall and now to online).

    The graph and text below demonstrate just how vulnerable even the giants of the corporate world are to consumer taste, technological innovation and competing enterprises. What makes you think that dipping into local taxpayers pockets to supplement the income statements and balance sheets of the favored and pet corporate friends of the county board, the EDC or the C100 will protect these firms from the verdict of the market place?

    Give us all a break, provide the business community with a level playing field. Create a low tax and low regulatory environment where businesses can focus on serving customers and not on fleecing taxpayers. Give entrepreneurs an unobstructed path to provide service and products to customers and you will establish a vigorous and growing local economy. Your past efforts at subsidizing failures and fantasizing about granduer is a proven, nagging failure and a $10,000,000 millstone. It was a "fool's errand" advocated by the most foolish among you. It should be seen and remembered for the farce that it was.


    Warren Smith

    Please forward to Chairman Langley.

    A 2012 article by Richard Foster ("Creative Destruction Whips through Corporate America") provides a great example of "creative destruction" in the US economy and stock market  -  the accelerating turnover in the S&P500 Index based on almost 100 years of data. Here are some key findings:

    1. US corporations in the S&P500 in 1958 remained in the index for an average of 61 years. By 1980, the average tenure of an S&P500 firm was 25 years, and by 2011 that average shortened to 18 years based on seven year rolling averages. In other words, the churn rate of companies in the S&P500 has been accelerating over time (see top chart above, and examples of the S&P500 churn in the bottom chart).

    2. On average, an S&P 500 company is now being replaced about once every two weeks.

    3. At the current churn rate, 75% of the S&P 500 firms in 2011 will be replaced by new firms entering the S&P500 in 2027.

    4. In 2011, a total of 23 companies were removed from the S&P500, either due to declines in market value (for instance, Radio Shack's stock no longer qualified as of June) or through an acquisition (for instance, National Semiconductor was bought by Texas Instruments in September).

    And here's Foster's conclusion:

    As we head into a time of stronger growth coupled with increase technological change, the message for senior executives is clear: if you aim to maintain control of your corporation and deliver value to shareholders and customers, you must embrace creative destruction rather than wait to become a victim of this unstoppable force.

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