Chapter 6 : Longevity - The Secret to Sustaining Company Valuation!

The key to investing is not assessing how much an industry is going to affect society, or how much it will grow, but rather determining the competitive advantage of any given company and, above all, the durability of that advantage.

Warren Buffet

Longevity : An explanation

While some companies flourish through their edge of time, others fizzle out after a quick burst of creative products. What is it that makes a company enjoy success for long periods? How does one define the longevity of a business ?

Longevity is the ability of a company to experience a long forecast period (value growth duration), i.e. a period in which a company earns more than the cost of capital, experiences value augmentation, and creates shareholder wealth. This longevity can be built based on the company's distinct competitive advantages.

Estimating Forecast Period is the second step in the process of valuation.

A business's longevity relies on what they produce today and for how long it will still be relevant in the future. Companies like Apple Inc., Microsoft, Google, etc. are notable examples as these businesses have a competitive edge over the market to protect their sustainability.

Business Longevity is a relative concept measured in innovation cycles, not years. Depending on the industry type, one can decide the value creation period, based on the product life cycle of the business. Industries such as professional services, banking, insurance, FMCG, etc. naturally incline to a long time frame of growth value period when compared to other industries such as technology, where the pace of change tends to be much faster. A tech firm creates value in a short period of time whereas for a consumer product company it may take decades.

Factors defining longevity of a company

Longevity is a critical factor in defining the forecast period of a company. It depends on factors like:

Market size and Opportunity

The emerging needs of the consumers, the potential of the product, and the opportunity to grow in the market lay a foundation for strong longevity.

Amazon became one of the largest internet companies by revenue in the world by venturing into online retailing with a value pricing strategy. Initially, Amazon's founder Jeff Bezos only targeted the USD 10 billion book market in the US but the vision and opportunity for market penetration by an expansion of product portfolio and new markets gave it longevity. Furthermore, Amazon's unique Supply Chain Configuration has an unmatched competitive edge and ability to grasp this opportunity to the maximum. That is how one can derive Amazon's longevity.


Disruptive innovations such as radical shifts in technology, customers, regulatory changes, etc., create new markets, are key differentiators for a company, and can considerably increase its longevity.

Apple Inc., launched the first touch-screen phone with its unique Operating System and in-built personalized features, disrupting the entire mobile market and emerging as a leader in the space. Differentiating itself through strong brand power and customer loyalty, Apple today swallows over 60% plus profits of the smart-phone industry.

Likewise, Gillette was the first company to introduce razors in 1919. Ever since its introduction, the company has had a strong market consumption and always had over 50% market share. Creating a legacy of quality products, formidable brand power, and distribution channel that retains over 50% of the global market share, the company has created its longevity.

Economic Moat

Economic Moat is the likelihood of the company to keep its competitors at bay for an extended period.

The strong distribution network, product innovation, patents, cost advantage, government licenses, etc., are some of the moats created by companies for longevity.

ITC, with a brand heritage of about 100 years, has created value in the cigarette market enjoying a formidable market leadership with a market share of over 80% in the Indian economy. The company's strong distribution network i.e. 10 million points of sale and distinctive quality through 12 iconic brands creates irreplaceable economic moats making ITC Cigarettes the strongest contender in the smoker's world!

Similarly, the Arabian oil company - Aramco became the world's largest energy company with 330 billion barrels of oil reserves coming from its rich source of natural reserves. Aramco's cost of oil production, about $2.8, is the lowest in the world. Aramco's high resource ownership gives it a competitive edge.

Brand Heritage & Market Share

Brand heritage is created when a company's brand of specific products is placed well enough in the market despite sustained competition and adverse economic environments for decades.

Coca-Cola was the first to introduce soft drinks in the market in the year 1886. The brand's unique recipe and customer demand have carved a considerable space in the market, while the company developed a ubiquitous distribution network and branded itself as the world's largest soda maker. With a heritage of 133 years, Coca-Cola today sells 1.9 billion drinks each day in more than 200 countries enjoying a higher market share than its biggest competitor - Pepsi.

The 125-year-old company, Nestle, is the largest consumer brand today with more than 2000 sub-brands ruling the consumption of the masses across 189 countries.

Ferrari, the Italian luxury sports car manufacturer, gets its exclusivity factor as the brand heritage that bestows it with pricing power. Ferrari reports an Operating Profit Margin of over 20%. Brand Heritage allows companies to impose premium pricing for their products, acquire market share seamlessly, and increase their longevity.

Entry barriers in the industry

Industries like tobacco, alcohol beverages, pharmaceuticals, telecommunication, etc. impose barriers to new entrants on the grounds of licenses, extensive capital, research, patents, quality, etc. increasing the longevity of the existing companies. The barrier in entry helps keep new competitors away and ensures a level playing field amongst the existing companies.

Pfizer, the internationally acclaimed and one of the best companies in the pharma sector holds the highest number of patents in the industry with innovative and revolutionary products. Pfizer enjoys an almost monopolistic role and strong longevity in the industry owing to its strong innovation power and entry barriers in the industry.

Supply Chain

Supply Chain Integration is an edge that can change the value of the company significantly.

Walmart Inc., the American multinational retail corporation operating chains of hypermarkets, discount department stores, grocery stores, etc is known for its exceptional supply chain. Walmart's low net working capital amongst its peers aids the company in passing on cost benefits to competitors and ensures efficiency, thereby increasing the longevity of the business.

The Market functions, majorly on two types of companies -

  • Companies that create value and endure over decades or centuries.
  • Companies that create value for a limited period and then either stabilize or gradually fizzle out.

The above factors cover the core of longevity distinguishing the first type of company from the other. Longevity is defined as the corporate lifecycle of a business (on an average of 60 years) excluding the impact of disruptive technological innovations and external factors such as natural disasters, economic slowdown, etc.

The concept of longevity assists in the estimation of the Forecast Period of a company and is an important Value Driver in Company Valuation.