Fortune’s June 16 issue carried it’s editor’s boast over the magazine’s 60th annual ranking of the 500 largest U.S. companies and how their collective profits exceeded $1 trillion (“Wow!”)
More soberly, on June 14, Peter Diamandis (X-Prize founder and Singularity University’s co-founder) was advising attendees at an Exponential Finance conference in New York City that 40% of those Fortune 500 companies are forecast to disappear from Fortune’s 2024 list after being disrupted by other companies.
Diamandis warned that linear-thinking companies — the companies trying to protect what they have instead of trying “crazy” ideas — will be disrupted at a time when the rate of change is increasing as fast as it is, adding “the day before something is a breakthrough it’s a crazy idea.”
Pointing to virtual reality gaming startup Oculus VR, he noted how “in only 18 months it went from a duct-taped prototype in a garage funded through Kickstarter to a 78-employee firm acquired by Facebook in March for $2 billion.”
And, of course, there’s the once mighty Kodak with 145,000 employees that went bankrupt in January 2012 after neglecting the digital camera it invented in 1975 (see “They Called It “Film-less Photography” at http://cims.ncsu.edu/cims_newsletter/spring-2012/. Only three months later Facebook acquired the digital-photo-sharing startup Instagram for approximately $1 billion in cash and stock.
“If you’re not trying to disrupt yourself then you’re dead already,” Diamandis said.
Churning and Creative Destruction
Diamandis could have also cited the comparison U. of Michigan economics professor Mark J. Perry, made between the Fortune 500 of 1955 and 2011. He counted only 67 companies appearing in both lists.
“In other words,” Perry wrote (http://mjperry.blogspot.com/), “only 13.4% of the Fortune 500 companies in 1955 were still on the list 56 years later in 2011, and almost 87% of the companies have either gone bankrupt, merged, gone private, or still exist but have fallen from the top Fortune 500 companies (ranked by gross revenue). Most of the companies on the list in 1955 are unrecognizable, forgotten companies today. That’s a lot of churning and creative destruction.”
How the S&P 500 Fare
Similar results can be found for the S&P 500 stock market index, which covers roughly 80% of the American equity market by capitalization. As it inched toward the emotionally exciting 2000 record in mid-June, investors might have recalled a 2012 interview that Richard Foster, Yale University management professor and Entrepreneurial Institute executive in residence, gave to BBC business news.
The average lifespan of a company in the index “has decreased by more than 50 years in the last century, from 67 years in the 1920s to just 20 years today,” he said. Foster, a longtime McKinsey & Co Director who researched and wrote extensively about innovation and long-term business performance prior to Yale, estimated that by 2027, “more than three-quarters of the S&P 500 will be companies whose names we do not now know.”
“That’s’ still a pretty good estimate,” Foster told IMR in June, noting that he meant the time companies last in the Index and not how long they may live on as a division of a larger company through merger or acquisition.
He added that if you remove the roughly 100 “Methuselah’s” from the S&P 500 —those significant survivors like Exxon, P&G and J&J — then the turnover rate for the Index with 20% fewer companies is actually 25% higher.
“But there’s a natural limit for this; you can’t have all the S&P 500 companies turning over every year — even every 10 years would be a very high rate, and we’re getting close to that. So to draw a straight line between what’s happened in the past and today would not be correct. However, the present pace of change is a lot faster than it was 25-30 years ago.”
That’s especially evident in China where Foster’s survey of 60 foreign indices has pinpointed the Shanghai index as the speedbreaker for turning over every 10 years, “an extraordinary pace and maybe the practical maximum.” It means, he explains, that while Japan where the Nikkei turns over every 50 years will probably look in 10 years more or less like it does today, China clearly will not. “That has implications for international competitiveness, trade, investment flows, and management—simply because of the speed of change.”
Overall, Foster doubts the current rate of change can continue to accelerate, although its nature is likely to change, with more industries being affected. “Certainly the rate of change in healthcare is going to continue accelerating but industries like steel are a long way from being disrupted. Significant disruption in autos will also be hard to come by unless Elon Musk is successful with the Tesla, and he might well be.”
Big Companies Can Change the World
So, should big companies give up on innovation? That’s the question Scott Anthony asked in the title of his March 11 HBR blog (blogs.hbr.org/2014/03). Quoting Archimedes that with a lever and place to stand he could move the world, Anthony, who is managing partner of consulting firm Innosight, wrote: “Big companies have the fulcrum. Innovation can be their lever. Big companies have the capacity to change the world.”