Tech­no­log­i­cal dis­rup­tion isn’t re­ally a big prob­lem for the For­tune 500.

The play­ing field for Amer­ica’s largest com­pa­nies may be more sta­ble than it has been in decades

The Washington Post Sunday - - BUSINESS - BY ANA SWAN­SON ana.swan­son@wash­post.com

For many peo­ple, the most fas­ci­nat­ing part of the an­nual For­tune 500 list is spot­ting the losers. While some com­pa­nies rise up the rank­ings, oth­ers slip or dis­ap­pear al­to­gether. In the new­est batch, re­leased in early June, Al­coa, Amer­i­can Air­lines, Cae­sar’s En­ter­tain­ment, J.C. Pen­ney and Sears all gave up ground, while Big Lots and Coach van­ished.

As for­mer cor­po­rate gi­ants such as Amer­i­can Mo­tors and RCA can at­test, the leader board of Amer­ica’s big­gest cor­po­ra­tions can change quickly. To top ex­ec­u­tives, this rep­re­sents the om­nipresent threat of “dis­rup­tion,” an idea that has be­come in­grained with an al­most re­li­gious zeal in some cor­po­rate cir­cles, with MBA pro­grams, books and con­fer­ences all coun­sel­ing busi­ness lead­ers to “dis­rupt or be dis­rupted.”

In fact, in a poll by For­tune mag­a­zine of the list’s 500 chief ex­ec­u­tives, 72 per­cent named “the rapid pace of tech­no­log­i­cal in­no­va­tion” as their com­pany’s great­est chal­lenge.

Yet a closer look at the his­tory of the For­tune 500 sug­gests dis­rup­tion is not as big a force as many peo­ple think, es­pe­cially for Amer­ica’s largest com­pa­nies. In fact, aca­demic re­search by Dane Stan­gler of the Kauff­man Foun­da­tion sug­gests that the play­ing field for the coun­try’s largest com­pa­nies might ac­tu­ally be more sta­ble than it has been in decades.

Turnover among the For­tune 500 was 6.5 per­cent in the 2000s, which was a per­cent­age point or two lower than in the 1990s and 1980s.

Mean­while, th­ese mas­sive com­pa­nies are more vi­tal to the U.S. econ­omy than ever. In 2014, the For­tune 500 com­pa­nies to­gether had rev­enue that equaled 72 per­cent of U.S. gross do­mes­tic prod­uct, up from nearly 59 per­cent in the 1990s and 35 per­cent in 1955.

Stan­gler, the Kauff­man Foun­da­tion’s vice pres­i­dent of re­search and pol­icy, stud­ied his­tor­i­cal trends in For­tune 500 com­pa­nies. He said that while the list pro­vides a mean­ing­ful win­dow into Amer­i­can cap­i­tal­ism, most peo­ple do not in­ter­pret it cor­rectly.

“There is lots of talk about cre­ative de­struc­tion and the en­trance of new com­pa­nies, and that’s all cer­tainly go­ing on,” Stan­gler said. “But it also re­mains true that to­day’s big com­pa­nies can ac­tu­ally be big­ger and more far­reach­ing in scale than the big com­pa­nies of the past. This is true for em­ploy­ment, and it is true for their im­por­tance in the econ­omy.”

Dis­rupt or be dis­rupted

It is nat­u­ral to imag­ine that busi­nesses through­out time have been wor­ried — in some way or form — about dis­rup­tion. But it was not un­til the mid-1990s that a Har­vard Busi­ness School fac­ulty mem­ber, Clay­ton M. Chris­tensen, pop­u­lar­ized the idea of tech­no­log­i­cal change as both a risk and an op­por­tu­nity un­der the man­tle of “dis­rup­tive in­no­va­tion.”

Then, as now, dis­rup­tion was a deeply un­set­tling idea for es­tab­lished com­pa­nies, which is par­tially why it at­tracted so much at­ten­tion.

New Yorker staff writer Jill Le­pore de­scribed the con­cept this way: “As Chris­tensen saw it, the prob­lem was the ve­loc­ity of his­tory, and it wasn’t so much a prob­lem as a missed op­por­tu­nity, like a plane that takes off with­out you, ex­cept that you didn’t even know there was a plane, and had wan­dered onto the air­field, which you thought was a meadow, and the plane ran you over dur­ing take­off.”

Chris­tensen’s the­ory gained mo­men­tum in the 1990s be­cause it cap­tured the dy­nam­ics of the decade. The rise of the In­ter­net cre­ated the very kind of tech­no­log­i­cal shift that gave small, in­no­va­tive start-ups the chance to over­throw more-es­tab­lished gi­ants. Big, suc­cess­ful com­pa­nies such as Xerox and Dig­i­tal Equip­ment Cor­po­ra­tion woke up to find them­selves wan­der­ing around the air­field, at risk of get­ting run over.

That threat of dis­rup­tion is still rel­e­vant, re­mak­ing in­dus­tries as di­verse as taxis, news­pa­pers and depart­ment stores. Yet Stan­gler’s re­search sug­gests that tech­no­log­i­cal dis­rup­tion and the rise of new en­trants is not the ma­jor fac­tor in changes among the For­tune 500. The far more mean­ing­ful one is de­ci­sions by com­pany man­age­ment to carry out merg­ers and ac­qui­si­tions. Based on his stud­ies, nearly two-thirds of the com­pa­nies that ex­ited the For­tune 500 in the 2000s left be­cause of M&A trans­ac­tions.

More­over, if you trace the his­tory of many great by­gone Amer­i­can com­pa­nies, they ac­tu­ally live on as part of other cor­po­rate gi­ants. RCA was ac­quired by Gen­eral Elec­tric in 1985, and Amer­i­can Mo­tors was ac­quired by Chrysler in 1987, while Amer­i­can Can merged with an­other com­pany that was even­tu­ally pur­chased by Cit­i­group.

Some merg­ers and ac­qui­si­tions hap­pen be­cause of tech­no­log­i­cal dis­rup­tion, but most hap­pen for a wide va­ri­ety of other rea­sons. In the 1980s, for ex­am­ple, changes in an­titrust law, dereg­u­la­tion and other fac­tors made it prof­itable to split com­pa­nies apart. In the 1990s, the in­for­ma­tion tech­nol­ogy bub­ble fu­eled a wave of M&A, with com­puter soft­ware, sup­plies and ser­vices com­pa­nies snap­ping one an­other up.

De­ci­sions by com­pany man­age­ment to take their firms public or pri­vate also play a role, since the For­tune 500 list in­cludes only public and closely held com­pa­nies for which rev­enue in­for­ma­tion is pub­licly avail­able. For ex­am­ple, MasterCard, which was for­merly or­ga­nized as a co­op­er­a­tive of banks, joined the list in 2006 — not be­cause it was a new dis­rup­tive en­trant, but be­cause its man­age­ment team fi­nally de­cided the time was right to go public, Stan­gler said.

Part of the list’s fluc­tu­a­tion is also be­cause of mean­ing­less noise, Stan­gler added, such as changes in the method­ol­ogy for clas­si­fy­ing com­pa­nies or small churn­ing at the bot­tom of the list, as com­pa­nies slightly rise above and fall be­low the 500 mark year to year.

For all th­ese rea­sons, Stan­gler said, the turnover rates you see on most such rank­ings are “vastly overblown.”

What about ev­ery­one else?

For all the buzz about start-ups and small busi­ness in the United States, the mas­sive cor­po­ra­tions of the For­tune 500 are ac­tu­ally more im­por­tant to the econ­omy than ever. Taken to­gether, the 500 com­pa­nies on the most re­cent list earned $12.5 tril­lion in rev­enue and $945 bil­lion in prof­its in 2014 and em­ployed 26.8 mil­lion peo­ple world­wide — a lit­tle larger than the pop­u­la­tion of Australia.

More re­mark­able than the churn among this elite group is in­stead the en­dur­ing sta­bil­ity of its top mem­bers. Since the rank­ing be­gan in 1955, only three com­pa­nies have held the No. 1 spot — Gen­eral Mo­tors, Exxon Mo­bil and Wal-Mart. There are also 57 com­pa­nies that have been on the For­tune 500 list since its in­cep­tion, in­clud­ing Proc­ter & Gam­ble, Her­shey, Pep­siCo and Chevron. Among other fac­tors, changes in an­titrust law and dereg­u­la­tion have helped to shield big com­pa­nies like th­ese against up­starts.

Re­cent re­search from Ge­orge Ma­son Uni­ver­sity (which looks at all com­pa­nies in the United States, not just the For­tune 500) shows that new com­pany star­tups and fail­ures have grad­u­ally de­creased since the 1980s. Job cre­ation and de­struc­tion also slowed sub­stan­tially in the same pe­riod, a sign that the cor­po­rate land­scape is less tu­mul­tuous than it was sev­eral decades ago.

As a re­sult, U.S. com­pa­nies have got­ten, on av­er­age, older, ac­cord­ing to Stan­gler’s re­search. In 1982, 1 in 5 peo­ple were em­ployed in a com­pany five years old or younger. By 2009, that pro­por­tion had fallen to 1 in 8.

Although politi­cians of­ten talk about the im­por­tance of small­busi­ness cre­ation, most U.S. jobs do not come from start-ups. Ac­cord­ing to re­search from Ge­orge Ma­son, half of all jobs gen­er­ated by newly formed com­pa­nies dis­ap­pear af­ter five years. By con­trast, Wal-Mart em­ploys 2.2 mil­lion peo­ple, in­clud­ing 1.3 mil­lion Amer­i­cans.

This rigid­ity of the cor­po­rate land­scape is not nec­es­sar­ily a good thing. As Justin Fox wrote in the At­lantic, when cor­po­rate dy­namism de­clines— as it has in the United States for decades, es­pe­cially since 2000 — so does pro­duc­tiv­ity growth, which is the main driver of im­proved stan­dards of living.

No one knows for sure why there is less dy­namism; and why, for ex­am­ple, the new­est U.S. gov­ern­ment data shows a sig­nif­i­cant drop in pro­duc­tiv­ity growth in the first three months of 2015. It could be the re­sult of ex­ces­sive reg­u­la­tion, or that U.S. com­pa­nies have be­come less ef­fec­tive and en­tre­pre­neur­ial, or be­cause we are merely await­ing the next trans­for­ma­tive round of tech­no­log­i­cal change.

The prob­lem is not, how­ever, ma­jor cor­po­rate dis­rup­tion. If re­search shows us any­thing, it’s that the U.S. econ­omy could ben­e­fit from more For­tune 500 shake-ups, not fewer.

The For­tune 500 are more im­por­tant to the econ­omy than ever. Taken to­gether, the firms on the most re­cent list earned $12.5 tril­lion in rev­enue and $945 bil­lion in prof­its in 2014 and em­ployed 26.8 mil­lion peo­ple world­wide.

MARK ELIAS/BLOOMBERG NEWS

Although ma­jor com­pa­nies in­clud­ing Amer­i­can Air­lines, J.C. Pen­ney and Sears slipped in the most re­cent For­tune 500 cor­po­rate rank­ings, re­search shows that turnover among the big­gest U.S. firms is lower now that it was in the 1980s and 1990s.

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