Why Companies Are Always Dying and Cities Are Hard to Kill

This is from a New York Times article on Geoffrey West, a theoretical physicist who has applied his theorizing to further our understanding of how cities work. Although the entire article is compelling, in the final section Mr. West offers a theory about the life span of the corporation:

But it turns out that cities and companies differ in a very fundamental regard: cities almost never die, while companies are extremely ephemeral. As West notes, Hurricane Katrina couldn’t wipe out New Orleans, and a nuclear bomb did not erase Hiroshima from the map. In contrast, where are Pan Am and Enron today? The modern corporation has an average life span of 40 to 50 years.

This raises the obvious question: Why are corporations so fleeting? After buying data on more than 23,000 publicly traded companies, Bettencourt and West discovered that corporate productivity, unlike urban productivity, was entirely sublinear. As the number of employees grows, the amount of profit per employee shrinks. West gets giddy when he shows me the linear regression charts. “Look at this bloody plot,” he says. “It’s ridiculous how well the points line up.” The graph reflects the bleak reality of corporate growth, in which efficiencies of scale are almost always outweighed by the burdens of bureaucracy. “When a company starts out, it’s all about the new idea,” West says. “And then, if the company gets lucky, the idea takes off. Everybody is happy and rich. But then management starts worrying about the bottom line, and so all these people are hired to keep track of the paper clips. This is the beginning of the end.”

Under this framework, at what stage is Netflix, shares of which have tripled in 2010?

Check out the Biggest Wall Street Stars of 2010.>>

(via Tim O’Reilly Twitter)

mtaylor [at] observer.com | @mbrookstaylor

Why Companies Are Always Dying and Cities Are Hard to Kill