Does Every Business Have to Die?

In this segment from the Rule Breaker Investing podcast, Motley Fool co-founder David Gardner elaborates on some ideas his prior episode's guest, author Les McKeown, laid out in Predictable Success. The book traces the seven life stages of organizations, and offers insights on how businesses can first reach the central, most successful one, and then stave off the descent to the last one: "death rattle." But listener Anthony suggests that in a way, the companies that navigate back from the brink are just postponing matters. Sooner or later, entropy is bound to get them. "Yes," replies Gardner. "Yes, but..." And of course, what comes after that "but" is where the answer gets interesting.

A full transcript follows the video.

This video was recorded on March 28, 2018.

David Gardner: Rule Breaker Investing Mailbag No. 1: This one comes from Anthony. "Hi, David. Great show. It seems to me that every business will eventually experience the death rattle stage." Now, what Anthony's doing, here, is he's reflecting on the Predictable Success framework from last week and the death rattle, which is the final of all the stages; basically, the death stage for businesses that couldn't pull back from treadmill and get back up to predictable success, as I hope you'll remember.

And by the way, if these terms are confusing you, that means you missed last week's podcast. I highly recommend you go back and listen to it -- at least three times.

"Much like an aging body, a business, regardless of its level of success, will decline," says Anthony, "as the effective synergy of its visionaries, processors, and operators grows to become imbalanced. Even the New England Patriots can't be the New England Patriots season after season. Remember Plunkett and Ethan?" That's an old-time NFL reference. Well played, Anthony.

"The answer is to stave off the inevitable by finding that synergy to maintain success and periodically modifying this proprietary blend to stay." I think you mean here, relevant. "Alas, just like someone doing everything possible to stay young, every business will succumb to Father Time. Thanks for always delivering the goods, Anthony. P.S.: I will try to follow up with how this episode made me reflect on my own business. Got to get back to dancing." He signs it with "Ballroom Blitz." It sounds like Anthony has a dance business.

So, why do you open that up? I just want to make a couple of points about that -- about the death rattle. Is it inevitable? Is it inevitable that every business will one day die?

Well, first of all, we should say yes, it is. Everything will one day die. It might be thousands of years. I believe the longest-running business on Earth has been around for -- I'm going to make this up and you can google it -- something like 600 years. I believe it's a Japanese company.

The point is that's a long time. That's more than twice the age in the United States of America, which is the world's longest-running democracy. That is a really old business. I think there are beer businesses that date back maybe a thousand -- there are some businesses that have been around a long time.

Everything's going to die one day. Our sun is going to die one day. So, yes. But I think a big part of Les's point, point No. 2 for me, is that there is not an inevitable near-term death, or kind of a rise and fall within a single generation of any given business. In fact, the Predictable Success framework has you focused on the two things that you need to be balancing out to stay at the top, the capstone of the arch.

Again, if you're an emergent, earlier-stage company, you need to add some process so that people don't get confused as you scale. In order to scale well, you're going to have to have some process in there. But, if process takes over too much and people are filling out too many forms and wondering why they have to do this thing that they're now doing at work that they never had to do before; if you start getting that sense that process is taking over well, darn it, you need to start reemphasizing people and that's Les's point.

And if you do that, I think you can go for a long time assuming you have my two other components, which are points No. 3 and No. 4 in my answer. The third point, the first component you need to blend in with process vs. people orientation is your purpose.

Sometimes you might be balancing process and people really well, but the purpose of your entity is losing relevance. Maybe there's some upstart competitor or new technology. You might be doing everything right internally, but the world is changing externally and so you need to be evolving your purpose.

If you're a purpose-driven company like The Motley Fool, like a lot of "conscious capitalism" companies that we've followed and talked about here -- and like a lot of the stocks I recommend because that's something I look for -- if it's a purpose-driven business, make sure the purpose evolves, maybe, from one era to the next, at least, so that you stay relevant and stay on top of helping the world.

After all, Roy Spence, our former guest here on Rule Breaker Investing, says most good businesses these days are, in Roy's parlance, "they're in the life improvement business." You should be. Are you in the life improvement business?

And then finally the other component, and this is my point No. 4 closing point and answer to Anthony's note, is I think you have to have capital. You're going to need to have capital. Now, if you rack up a lot of cash on your balance sheet, you have no debt, and you haven't evolved your purpose very well, and you might be in treadmill, good news for you. You have a lot of capital.

The more capital that you have -- typically I'm thinking about financial capital right now but, of course, human capital matters a lot, too -- if you're amassing capital, that is a wonderful proof against the eroding power of Father Time.

Again, to summarize, if you are evolving your purpose and you have a good base of capital, and you have "conscious capitalism" and predictable success in your head as the CEO or the person with their hand on the tiller, the entrepreneur, I think you can go a good, long time. And darn it. I hope your business -- your organization -- I hope it outlives you.