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By Randall S Peterson
We’re told that the traditional business order is under threat. But is digital disruption going to sweep away the old?
No one wants to be the next Kodak, Nokia or Blockbuster – those infamous subjects of disruption that demonstrate times when even smart, well-intentioned executives found themselves behind the curve.
I find these cautionary tales useful when it comes to getting executives to think about how digital technology is finding its way into every industry.
The message is clear: no-one is immune to the forces of creative destruction – you could be the next Kodak!
While this line of argument is engaging, not everyone buys it. Like the boy who cried wolf, we cannot expect to continue to be believed if our predictions of imminent disruption don’t come to pass. It has become almost axiomatic that we live in a world of unprecedented change, where corporate longevity is plummeting, and where incumbency is more a liability than an asset. But is all this really true? Or are we exaggerating the threat to these established companies?
I decided to tackle these questions by assembling some data. Several studies have made the case for a high rate of churn in membership of the Fortune 500 or S&P 500. I thought I would look at the same data with a slightly different question to see how much inertia there is in this set of large firms.
Here is the question I asked: How many of today’s Fortune 500 firms were founded in 1994 or later? By singling out these young disruptor firms, it follows that all the others are relatively well-set incumbents who have figured out a variety of survival strategies to help them stay relevant. I chose 1994 for two reasons. First, a quarter of a century felt like a sufficiently long time for a new challenger to become established. 1994 is also the year the World Wide Web was just getting started (i.e. with the first online sales) so any pure dotcoms would – by definition – be founded after that date.
“It provides us with solid empirical evidence of how much large-scale disruption has occurred up to now to stimulate a more informed discussion of what might come next.”
To be clear, this analysis isn’t intended to provide a crystal ball into the future; it won’t tell us if we are on the verge of future disruption. Rather, it provides us with solid empirical evidence of how much large-scale disruption has occurred up to now to stimulate a more informed discussion of what might come next. The table (below) provides this analysis, broken down into the industry sectors Fortune uses.
A total of 63 of today’s Fortune 500 were founded in 1994 or later. But the vast majority of these are spinoffs, demergers or restructurings (e.g. Mondelez, Hewlett Packard Enterprises, Navient, AbbVie). If you look at firms with no pre-existing assets in 1994, the number shrinks to 14, which is sufficiently few that I can list them here: Activision Blizzard, Alphabet, Amazon, Booking Holdings, Cognizant, eBay, Expedia, Facebook, Intercontinental Exchange, Netflix, PayPal, Salesforce, Tesla and Wayfair. The other 486 firms either existed before 1994, or were assembled from assets that existed before that date.
What is more interesting than this headline number is the distribution by industry sector. It’s no surprise that most of the churn is in technology (11 out of 42 are new since 1994), retail (8 out of 46) and media (4 out of 12). There is a surprising amount of action in energy, with 14 of 61 firms being new since 1994. But a closer look at this group shows they are all financial or operational restructurings, stimulated by the emergence of shale gas and renewables, by regulatory changes, and by a volatile oil price.
Table: Number of Fortune 500 firms in each sector
At the other extreme, five sectors have seen no post-1994 entrants, and 10 more sectors only have one or two new entrants. For example, take household products: Fortune lists P&G, Kimberly-Clark, Colgate-Palmolive, Stanley Black & Decker, Estée Lauder, Newell Brands, Mohawk Industries, Coty, Masco and Clorox. Apart from a few mergers (e.g. Newell swallowing Rubbermaid), this list would have looked remarkably similar in the 1970s. Not a great deal of churn going on there.
I have shown this analysis to various colleagues and classrooms of executives, and it’s safe to say most of them hate it. I have been accused of asking the wrong question, using the wrong data, and fundamentally misunderstanding the process of creative destruction.
Let me tackle some of the more pedestrian points of concern. First, this is the US-based Fortune 500, not the Global 500. But the global list would have given even fewer post-1994 entrants, partly because they are, on average, much bigger firms and partly because the US has more tech heavyweights than other large economies like Germany or Japan.
Second, this list doesn’t include mid-sized and smaller firms, many of which are potentially very disruptive. But of course many of these smaller firms will fail, and most of those that succeed end up being acquired by large established firms. Which helps to emphasise my point, namely that established firms have developed a range of tactics –such as acquiring would-be competitors – to help them endure.
“I have shown this analysis to various colleagues and classrooms of executives, and it’s safe to say most of them hate it.”
Third, it’s also worth bearing in mind that the Fortune list is based on revenues, not market capitalisation, and if you looked at the top 500 by market cap you would see a much bigger number of young fast-growing digital firms (often loss-making). But all that tells us is investors are buying the argument I opened this piece with – that future disruption is real. The point of my analysis is to make sense of what’s gone before, and for this, real revenues and profits are what matters.
But some of the challenges to this analysis are more substantial and profound. Three in particular:
The make-up of the Fortune 500 is hardly a secret, so there should be no huge surprises in this analysis. But given how much talk there is about increasing levels of churn in these lists of established firms, it is important to remind ourselves of the facts. Here are five key takeaways:
The bottom line here is that digital disruption is a more nuanced phenomenon than most people realise. If your firm is in a traditional sector and makes physical products rather than digital services, these forces of creative destruction are a threat to your continued growth, your capacity to capture new opportunities, and your profit margins, but they rarely represent an existential threat.
So remain vigilant, be proactive in how you respond and don’t panic: contrary to what some business school professors might tell you, the evidence tells us that you’re extremely unlikely to become the next Kodak, Nokia or Blockbuster.
A version of this story first appeared on Forbes under the title Digital Disruption – The Power of Nuance and the Dangers of Extrapolation
Julian Birkinshaw is Professor of Strategy and Entrepreneurship; Deputy Dean (Executive Education and Learning Innovation). Professor Birkinshaw’s main area of expertise is in the strategy and organisation of large corporations, and specifically such issues as innovation, corporate entrepreneurship, strategic agility and headquarters-subsidiary relationships.
He is a Fellow of: the British Academy, the Academy of Social Sciences and the Academy of International Business. He has been awarded Honorary Doctorate degrees by the Stockholm School of Economics (2009) and Copenhagen Business School (2018).