Zombie companies are altering the business life cycle

John Battelle wrote a while ago, “As a culture, two classes of animated beings populate our lives. One are living – people, pets, E-Coli, grasshoppers. The other are machines – computers, leaf blowers, automobiles.”

I’m no scientist so I’ve got to agree with him, except that it could be argued companies are somewhat in between those two groups.

Many would say that a business is an entity that lives and breathes. Organisations have their own personality that’s communicated through their marketing, services and products. It stems from, and reflects the most organic of things: their culture. Companies are born, they require an element of nurturing and feeding. They hopefully grow and sustain themselves in the world. They can wilt and die too. All the metaphors are organic.

But since the economy has withered, the standard business life cycle which goes something like: start up, growth, established, expansion, maturity, decline, has seen the title of zombie company added.

Zombie firms are those who continue to trade even though the outlook for profit is beyond hopeless. They exist by paying the interest on their debts without the chance of shrinking the capital owed. They are the proverbial dead men walking.

The debate for and against these zombies existing goes something like:

a)    thank heaven they’re still trading and paying (as well as debt interest) their staff, national insurance, tax, rent, suppliers, utilities etc. Without them, the economy would be even worse. Let’s pray interest rates don’t climb and make servicing debts impossible. We should even consider writing off some of their debts in order to allow them to invest that interest payment back into company growth.
Long live the zombies, they are now a real provider within our economy.

b)    free markets need failures and using life support systems to keep them alive and service debt is simply cheating the game and prolonging the pain. The strong should win; the weak need to lose. The market will re-employ the capable staff and the customers will choose A N Other supplier so taxes and usage of products and services will still exist.
As in a garden, pruning back is necessary for long-term growth.

The renowned investor Jon Moulton of Better Capital said recently that failure is part of capitalism. In the 1990s when growth was ~3%, the business failure rate was ~1.6%. Now it’s a mask-the-problem, head-in-sand 0.4% failure rate against near zero growth. This juxtaposition is mirrored across the water too with the lowest insolvency rates in Portugal, Ireland and Greece. Italy and Spain not far behind. The highest insolvencies are in the much healthier economies of Norway and Germany.

What do you say? Should zombies be allowed to carry on or should we ruthlessly only preserve the stronger and arguably more capable firms?

Then again, is it a small fry question if you consider that the country is probably a zombie when, despite recent austerity, debt has risen to 85% of GDP?
Photo from WikiHow

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