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Young H., CEO |
December 10, 2024
Every company faces a crisis and, ultimately, the fate of decline and extinction. This inevitable trajectory is accelerating at an even faster pace. In the 1960s, the average lifespan of leading US companies included in the S&P 500 index was over 30 years. By the 1990s, this had decreased to around 20 years, and recently, it has further decreased to approximately 15 years.
As a result, out of the 500 companies originally listed in the index, only about 60 remain today. (The phrase “about 60” is used here because defining the survival of companies is challenging given factors like mergers and separations.)
If we expand the timeline further, the picture becomes even clearer. Out of the 12 iconic companies in the Dow Jones Industrial Average when it was established in 1896, not a single one remains after more than 100 years. Even General Electric (GE), once a cornerstone of the index and hailed as a management guidebook for executives worldwide, was ultimately removed from the Dow in 2018, closing the chapter of its legacy.
Why does this happen? Why do companies inevitably walk the path of decline and extinction?
Economists will interpret this through market demands and shifts in the economic landscape. Management scholars might seek answers in organizational structures or managerial positions, while sociologists and other humanities experts may focus on organizational ethics or changes in intangible values.
However, from the perspective of physics, this phenomenon can also be explained through the second law of thermodynamics. In other words, all matter in the universe—including the mental constructs it creates—progresses toward a state of disintegration (disorder) and does not reverse.
For instance, when you open a pressure cooker, the water molecules trapped inside may diffuse uniformly into the air, creating a disordered state. However, these molecules never return to a neatly arranged state of order by clustering uniformly in a specific corner of the kitchen, for example.
So, how do we explain the formation of galaxies, the emergence of life within them, the cultures and organizations those lives create, and the birth and growth of companies?
The energy condensed into an infinitely small point at the time of the Big Bang expanded explosively, much like the steam molecules escaping the pressure cooker, spreading across the cosmos. Through this diffusion, the energy interacts to form the simplest structure: hydrogen and helium atoms.
Gas clouds formed and, under the influence of gravity, pulled in surrounding gases, growing larger over time. When large enough, external stimuli like supernova explosions triggered the formation of stars, with nuclear fusion at their cores. The debris and remnants in the surrounding clouds coalesced to form planetary bodies, such as Earth. (Notably, the Sun accounts for 99.9% of the solar system’s total mass.)
In summary, the universe follows a process where condensed energy explodes, disperses, and disintegrates. Yet, in fleeting moments within this timeline, some energy temporarily coalesces, giving rise to a phenomenon such as the birth and death of stars and life.
The creation of a company is no different. It begins when an individual consolidates intangible elements—knowledge, experience, passion, and vision—that were wandering shapelessly in the world, eventually giving rise to a tangible entity: the company. Once established, the company absorbs energy from its surroundings—talent, capital, and profit—to grow. Just as stars consume one another, companies also compete, merging, acquiring, or fading into obscurity. A fortunate few survive, but the majority appear briefly and then disappear.
Even successful companies eventually face diminishing external energy sources and internal resource depletion. The reasons for this depletion are as varied as the perspective of those observing. However, one undeniable truth remains: energy spreads out and ultimately disintegrates.
In the cosmos, gravity pulls apart gas clouds and reforms them into new stars. In companies, internal energy—particularly the will and ability of its leaders, resists the forces of disintegration and holds the organization together. Inertia, after all, governs all matters, including humans—nothing moves without force, and nothing changes its speed or direction without it.
As I sit in a pub on a dimly lit street corner in a foreign land, my thoughts drift as I sip a beer with my meal. Resisting the inevitable disintegration of an organization to briefly hold it together and even grow is a daunting, energy-intensive task. Today, there are around 80 employees in the company. Over the past 20 years, nearly 10 times that number has come and gone. Each person who left moved along the path of disintegration. Those of us remaining, including myself, are just cosmic dust, inching in the same direction. Therefore, just as life is miraculous compared to death, it is not surprising that companies fail; it is astonishing when they do not.
While entrepreneurs may sometimes be seen as scrappy survivors, like mice in the gutter, even amid the chaos, life offers us a refreshing glass of beer to sustain our spirit.
