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
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.
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.