Beyond Earnings

8THE COMPETITIVE LIFE‐CYCLE OF CORPORATE EVOLUTION

“One general law, leading to the advancement of all organic beings, namely, multiply, vary, let the strongest live and the weakest die.”

—Charles Darwin, The Origin of Species

Elwood: It’s 106 miles to Chicago, we got a full tank of gas, half a pack of cigarettes, it’s dark, and we’re wearing sunglasses.

Jake: Hit it!

—The Blues Brothers

KEY LEARNING POINTS

• A competitive life‐cycle framework can help investors think critically about the challenges a firm will confront as it develops and quantify its probability of success.
• Four states of development can be described by profitability and expected growth:
  • Question Mark (low profitability and high growth)
  • Star (high profitability and high growth)
  • Cash Cow (high profitability and low growth)
  • Dog (low profitability and low growth)
• New firms typically start as Question Marks; less than 13% become Stars.
• Cash Cows exhibit the highest profit persistence and lowest CFROI volatility. An elite subgroup of Cash Cows and Stars are unusually persistent. HOLT calls these stocks eCAPs, which is a badge of honor that signifies impressive competitive advantage.
• Dogs have the largest variability in future CFROI. Most Dogs fail to fix their business.
• Companies “exit” at all points. By exit, we mean the corporate entity ceases to exist as a stand‐alone enterprise. Only 50% of companies survive as a listed entity for 10 years. Most companies are acquired or merge as they age; about 2% go ...