Volatility creates ulcers for entrepreneurs and headaches for people who deal with them, but it's what keeps our economy strong
Most U.S. companies can be counted into one of only two camps. one is income oriented, the other entrepreneurial. The former camp houses all those enterprises created primarily to provide an alternative to working for someone else. These income businesses reach a steady employment level early in their history and, mostly, stay there. They are the local drugstores, flower shops, or garages. Their volatility -- their tendency to grow or decline -- is very low, usually zero.
Not so the occupants of camp number two. If one learns anything by following the individual fates of 12 million establishments over 18 years, it's that entrepreneurial businesses -- growth companies -- never just grow and rarely just decline. They do both, sequentially. As you might know if you run such a company, they seem strapped to a roller coaster, and they can't get off.
Cases differ, of course, but the patterns don't. Entrepreneurial businesses stumble onto something, get a big boost out of it, and grow significantly. Then, as soon as they think they're rounding third base, someone always seems to move home plate. Maybe there's a change in their economic world. A new technology eliminates the value of their market niches. Or perhaps they simply get cocky, or lazy, and lose track of the direction in which they were headed.
Whatever the cause, the inescapable fact is that the most likely result of any company's rapid growth is a slowdown -- even outright decline is quite common. But entrepreneurs are not stupid; in most instances, they learn from their mistakes or misfortunes. They reduce staff, develop new products, shackle costs, or crank up their marketing and selling machinery. More often than not, their companies take off again.
This chart makes the phenomenon plain: the best predictor of a big company's decline is previous rapid growth, the best predictor of rapid growth is a previous big decline, and stability is tied to a big decline as the best predictor of death. The company that tries to step off the ride and stand still is much more likely to go out of business than the company that hangs on through the ups and downs. And curiously enough, the phenomenon appears to be independent of company age, size, or industry.
PATTERNS OF EMPLOYMENT GROWTH AND DECLINE, 1983-87
Grouped by And How They Fared, 1985-87
1983-85 Rapid Slow No Small Big
Performance growth growth change decline decline Close
Rapid growth 8.18 11.6 53.9 11.4 6.1 8.2
No change 4.9 3.9 72.9 4.5 1.9 11.9
Big decline 15.3 3.2 63.8 3.2 2.4 12.0
Volatility occurs independent of company age, size, or industry.
By understanding volatility, you can prepare strategies for dealing with it.
Such volatility -- and the democratic way it afflicts all manner of entrepreneurial business -- prompts a question: why? Don't these companies ever learn from the past?
But the question is probably unfair. All the numbers assert that growth is inherently volatile. It is filled with uncertainties and unknowns that require companies to make constant adjustments -- movements both forward and backward -- simply to stay alive.
Still, if you're running an entrepreneurial business, there are lessons in this. By understanding volatility, you perhaps can make the terrain between peaks and valleys less steep.
You might think a little bit more about the business environment around you -- try to anticipate what might clobber you next, and get ready for it. There's a tendency during periods of growth to begin thinking that success has resulted from your actions alone, independent of events in the outside world. Yet usually there is a good chance that the niche you've found, and are thriving in, was created as a result of some broader force -- a baby boom, a strong dollar, rising oil prices, a generally vigorous economy, low interest rates, a strong stock market, or an aging population.
But things change, often when you're certain they won't. Nobody in Houston thought Houston would stop growing. No one thought the stock market would crash. Very few people realize that the baby boomers have stopped entering the work force (they're all in it now), and few have anticipated the consequences for office construction, the auto industry, or the appliance market.
So you should think carefully about what your success, or failure, is attributable to, what will happen if those circumstances change, and how you can prepare for (and better still, capitalize on) that change.
You might also plan better -- look ahead more prudently and in greater detail at your cash flow; cut expenses before you run out of money. Realistically (and certainly statistically), most of you will not do these things until it is too late, and you will ride the roller coaster along with everyone else.
But if you think running these companies is tough, try selling to them. Their needs, like their fortunes, are highly volatile. One minute they want to double their office space, the next they are walking away from their leases. On the up cycle, they are buying or leasing equipment like crazy, only to find themselves with excess capacity (and a short time later, no ability to pay for it). As they grow, they need money; as they decline they struggle mightily just to meet their fixed financial obligations.
Yet you cannot afford to ignore these companies as a market because, on the average, they constitute most of the net growth in the economy. So you will have to learn how to tailor your product or service to be inherently suited to volatility. Perhaps you can offer lease options as well as a straight purchase. Maybe you can create flexible plans through which you repossess what the growing companies don't need when they don't need it, and provide an ample supply of it when they do.
Because it's likely you extend credit to volatile companies, you're already in the business of financing the downturns whether you have recognized it or not, so you might turn that into an advantage by making cyclical financing a part of your original offer. Whatever you do, if you can't do it so that a volatile company can use it, pretty soon someone else will be serving most of the growth in America.
From a broader perspective, politicians and economic developers view this process with horror. They see the newspaper accounts of layoffs and plant closings all the time, and must deal with each one as a potentially embarrassing statement about the failure of their administrations or programs. It makes them look bad, and, by and large, bad is exactly how they'd describe the phenomenon as a whole. The Europeans, it's interesting to note, are so concerned about volatility that they have in many ways outlawed it.
Yet the fact remains: volatility is healthy. It cleans out bad ideas, out-of-date products, and inefficient people, replacing them with new ideas, products, and services. You can't glue the leaves on the trees -- as the Europeans have tried so hard to do. You have to recognize failure for what it is and let it drain out of the economic system.
If you don't allow failure an escape route, you will simply accumulate it in your existing institutions -- with disastrous consequences. Over the past 15 years, in the face of a baby boom of its own, Europe has increased its job base by only 1.1% -- one-thirtieth of the comparable growth in the United States.
As a nation we cannot, and should not, want to stop failure from happening. The rates of job losses due to volatility vary little from place to place. No area has figured out how to retain jobs. In fact, the healthiest economies in the country have the highest company-closing rates and overall job-loss rates, all because of volatility.
We must, however, do a far better job of dealing with volatility's consequences. Our Achilles' heel is the dislocated worker -- approximately 20 million people leave their jobs every year. As their skills become obsolete and their ability to land on their feet decreases each time they move, our ability to maintain a healthy economy decreases. Our challenge is thus not to minimize failure, but to turn it into an opportunity for those it affects.