Sunday, December 28, 2008

Darwinian Effect of Recessions: Weak Companies Fail, Leaving The Survivors Bigger and Stronger

NEW YORK - Economic cycles are Darwinian, picking off weak companies and leaving survivors stronger. A year into the recession, solid retailers have their pick of mall space. Respected banks are getting an influx of deposits. Tech companies with money to spend are having an easier time hiring.

It has been a year of brutal losses. More than 1.2 million jobs have vanished. The broadest measure of the stock market, the Wilshire 5000, is down more than $7 trillion, a 40% slide. Corporate survivors, however, should benefit as competitors disappear.

Retailer Bed Bath & Beyond will not have to contend with Linens 'n Things, which is in liquidation. Best Buy may not be fighting price wars with Circuit City, which is reorganizing in Chapter 11 bankruptcy. FedEx will not scrap for market share against DHL Express, a German-owned company that is leaving the United States.

Staying in business will not be easy - sales declines are a given and job cuts are likely to continue. But the United States will not remain in the dumps forever, and the companies that will be best positioned when the economy eventually improves may include these examples: Kohl's, Wal-Mart, McDonald's, Wells Fargo, Delta, Google, AT&T, Verizon.


At 12/28/2008 6:04 PM, Blogger OBloodyHell said...

> Corporate survivors, however, should benefit as competitors disappear.

This seems a doubtful claim, really, as far as societal benefit.

What should be the result is that newer and smaller, more efficient companies should be able to expand to enter the market against the larger, better ones that remain. With the deadwood but entrenched competition gone, the newer companies should find more "game" able to build themselves up on.

Every once in a while, the forest needs a fire to clear out the detritus and the weak trees, so the new plants can prosper.

At 12/28/2008 11:34 PM, Anonymous Anonymous said...

I think society benefits when the capital that the failed business consumed is freed to start new businesses with creative products and services - at least that's my understanding of Joseph Schumpeter's theory of creative destruction.

Considering that Chapter 11 reorganizations didn't exist when Schumpeter created his creative destruction theory, I wonder what would JS say today about such reorganizations. Would he say CH 11 is just delaying the inevitable destruction/creation cycle or would he posit that such bankruptcy forces the necessary changes/creation avoiding the destruction?


At 1/03/2009 3:38 PM, Anonymous Anonymous said...

Darwinian is not a good term wrt companies.

Bad companies die, true, but good companies don't reproduce. Sorry to say, but it doesn't work that way. Ask your mum!

Good companies get created out of thin air. No s*x involved, if you pardon my french.



Post a Comment

<< Home