Idea in Brief
Many people believe that technological disruption will destroy most old-economy companies, with Big Tech and unicorn start-ups ultimately taking over the world.
When you look at how the makeup of the Fortune 500 and the Global 500 has changed since the rise of the internet, that story doesn’t hold. Only 17 of the companies in the 2020 Fortune 500 didn’t exist in 1995. The picture is similar internationally.
Industry transformation happens very slowly, and incumbents can successfully respond to disruptive challenges in one of four ways: retrench, fight back, double down on existing assets, or diversify into new businesses.
The prevailing narrative in business today is one of ever faster change and creative destruction: Big Tech companies are taking over, the number of unicorns (start-ups worth $1 billion) keeps growing, the average tenure of old-economy companies on the S&P 500 is plummeting, and incumbency has never been worth less. The message to established firms—play catch-up or die—is bleak.
But let’s look at the bigger picture. Yes, there’s no denying the exponential growth of the large tech companies or the cautionary tales of disruption’s famous victims (think Nokia, Kodak, and Blockbuster). However, over the past three decades many large sectors of the economy have not been disrupted—that is, taken over by tech-enabled competitors that serve customers more efficiently and cheaply than incumbents do—to any significant degree. Indeed, most established firms are operating very successfully in today’s digital world.
Consider a couple of data points. The internet revolution started in the mid-1990s, a quarter century ago, long enough for the winds of change to work their way through the whole economy. So how many of today’s Fortune 500 didn’t exist back in 1995? Seventeen. The other 483 have been around, in some shape or form, since that year. When you look at the Global 500, the picture is similar.
Digital disruption is real, of course, but it has been oversold by three myths: Every sector is under threat, disruption happens quickly and is accelerating, and established firms are struggling to adapt. The facts suggest otherwise.
I have two objectives in writing this article. The first is to help businesspeople understand the reality of the past, which will better prepare them for the future. For example, many observers claim that we are on the cusp of full-scale disruption in industries such as finance, insurance, and education. My research shows that people have been making the same predictions—erroneously—since the 1990s. Knowing why these industries have not been disrupted so far will improve our ability to foresee how things might evolve over the next few years. My second goal is to help executives make better decisions. It’s often argued that the only way to fight a tech disrupter is to beat it at its own game—by, say, creating a new business in a separate unit. But I’ve found that there are at least three other valid strategies a company might want to adopt, depending on the circumstances. Organizations that approach competitive threats soberly and systematically will make smarter choices about how to not only survive but also thrive.
The Real Story
Let’s go back to the 1995 Fortune 500 and Global 500 and compare them with the 2020 lists.
In 2020, 198 of the firms that had made the Fortune 500 in 1995 were still on the list. Two hundred and fifty-six firms had dropped off it because they had merged with or been sold to other corporations or to private equity firms or were no longer big enough to qualify. Only 35 of the companies in the 1995 ranking went bankrupt. The 2020 list also contained 231 firms that were in existence back in 1995 and grew enough to get onto it. Another 54 were spin-offs and restructurings of previously existing businesses. And as we’ve noted, only 17 companies—among them, Facebook (now Meta), Google (now Alphabet), Tesla, Netflix, and Uber—were founded after 1995.
As for the Global 500, 164 of the firms that were on the list in 1995 still made it in 2020. Ten had died, 150 had dropped off the list, and 132 had been sold or merged with other firms. The 2020 ranking included only 12 entirely new companies; 324 firms were new to the list but either had existed or were formed from companies that were already around in 1995.
The big change here was geopolitical: The 2020 Global 500 had 95 fewer companies from Japan than the 1995 list did, and 116 more from China.
The bottom line: There has been less creative destruction than prior studies have suggested—indeed, less than most people believe.
I get a lot of pushback when I present this analysis. Some of it is about the limitations of the sample: The two lists don’t include private and venture-backed firms and professional partnerships and cover only a 25-year time period. These are fair points, but they don’t discredit the basic findings. If you want hard evidence about the changing patterns of consumer and industrial consumption, the Fortune 500 and the Global 500 are good places to start.
A bigger concern is that these rankings are based on sales revenue, not market value or profitability. I didn’t use market value because a share price merely reflects current investor sentiment about a firm’s future growth potential—which, at present, provides rosy views of Big Tech. Meanwhile, a dive into the profitability of firms that have stayed on the Fortune 500 shows that despite anecdotal examples of margins that have been squeezed by digital disruption in some industries, most companies are more profitable today than they were back then.
Let’s break the firms into five categories and examine the growth and profitability of each.
Mainstays are the companies that made both years’ lists. Fallers are those on the 1995 list that either were sold or merged with another company, or stopped growing. Risers are those on the 2020 list that already existed in some shape or form in 1995. The doomed are the companies from the 1995 list that went bankrupt. New arrivals are the (mostly digital) firms on the 2020 list that were established after 1995.
The new arrivals are of course growing rapidly. But equally impressive is the continued growth of the mainstays. Even the fallers—which dropped out of the Fortune 500 at some point—still show some growth.
The profitability data tells a similar story. The new arrivals went from no to very high profits, while the mainstays grew their profits year after year (apart from 2008, during the global financial crisis). Even the fallers remained profitable (except in 2008). Only the 35 doomed firms saw sustained losses.
A look at the Fortune 500 by sector shows that the only sectors seeing significant churn were TMT (technology, media, and telecom) and retail (which includes restaurants and hotels). Five of the 52 TMT firms on the 1995 list went bankrupt, and 10 of the 62 TMT firms on the 2020 list didn’t exist before 1995. In retail 19 of the 67 firms on the 1995 list went bankrupt, and three of the 74 firms on the 2020 list were new. The other sectors—energy, materials, and chemicals; industrials, automotive, and aerospace; consumer products; health care and pharmaceuticals; transportation and travel; and even financial services and insurance—all had high levels of inertia and look surprisingly stable.
Let’s revisit those myths I mentioned earlier: No industry is immune, digital disruption happens quickly, and established firms are unable to adapt. None of them is borne out by the facts. Some industries, like TMT and retail, have been moderately affected; some, like industrial and consumer goods, hardly affected at all. Disruption happens over a long time frame. The retail banking, insurance, education, audit, and consulting industries were seen as vulnerable in the 1990s, and even though changes are afoot in all those sectors, the old guard have not yet surrendered their dominant positions. And while some established companies have struggled over the past few decades, the evidence shows that they aren’t representative of broad trends. As I’ve noted, most incumbents have transitioned into the digital age quite well. So, with apologies to IBM’s Lou Gerstner for stealing his line, How did these elephants learn to dance?
When companies face a disrupter, their natural response is to fight fire with fire: to set up a competing digital unit, build an incubator or accelerator, or pursue a transformation. “Companies that adopt bold, offensive strategies in the face of industry digitization improve their odds of coming out winners,” argues a recent McKinsey study.
But that’s only one way to tackle the problem. Do a simple five-forces analysis to evaluate how digital technology affects your industry, and you will probably find that it lowers the barriers to entry in some areas, encourages new entrants, and increases the buying power of customers, especially in B2C markets. As every business student knows, the smart response is to push back against those forces—for example, by shoring up the barriers to entry, increasing your own bargaining power, and playing to your existing strengths. Sometimes that involves direct retaliation, but at other times an indirect or defensive response makes more sense. Sometimes you’ll want to focus on your existing markets; in other cases you should target new ones. A look at the strategies pursued by the Fortune 500 and Global 500 firms that successfully navigated the past 25 years of digital change reveals four general approaches.
The default reaction to disruption, again, is to try to take on an insurgent at its own game. Examples include British Airways’ launch of the no-frills service Go, since sold to EasyJet; the New York Times’ creation of NYTimes.com; and the major carmakers’ moves into electric vehicles. Incumbents can go head-to-head against disrupters by setting up new units, making an acquisition, or entering a joint venture. Fighting back is appropriate if the new technology represents an existential threat to the firm, but that isn’t true very often. Moreover, it’s extremely hard to do well: While there have been some successes, established firms have a poor track record overall when it comes to beating upstarts at their own game. Microsoft, for example, has struggled to compete with Google in search, and GM’s attempt to take on Uber with its Maven car-sharing service went nowhere.
Here, an established firm plays to its existing strengths. Consider Disney’s strategy in the 2000s. The company could have tried to compete in the nascent and uncertain streaming market, but instead it built on its proven strengths in moviemaking, buying Pixar and Marvel (and in 2012 Lucasfilm) and creating a string of blockbuster hits. Disney’s strong content library gave it huge bargaining power with Netflix and positioned it to choose a timeline for launching a streaming service of its own. Another example is Pfizer, which chose not to move into the unproven world of biotechnology in the early 2000s and instead capitalized on its prowess in marketing and distribution with the acquisitions of Warner-Lambert, Pharmacia, and Wyeth. In such cases, assets like a trusted brand, long-term relationships, and worldwide reach create entry and mobility barriers that are extremely hard for new entrants to overcome.
This is a defensive move—based on weakness, not strength—in which established firms yield ground to new arrivals and use a variety of tactics to ensure their own continued survival. One such tactic, commonly seen in declining industries, is consolidation through mergers and acquisitions. For example, the camera makers Konica and Minolta agreed to merge in 2003 when faced with the rapid growth of the digital market, and in mobile infrastructure Nokia Siemens Networks bought Alcatel-Lucent in 2016 to forestall the rapid growth of Huawei in 4G. Another tactic is to seek help from government and regulators in putting additional constraints on new entrants. Taxi firms did this when Uber first appeared in their markets, and many banks today are working with central banks and policy makers to regulate cryptocurrencies. Seen through the lens of the five forces, retrenching is a way for incumbents to increase their bargaining power, reduce industry rivalry, and raise barriers to entry.
Here the established firm simply migrates to new opportunities. One example is Thomson Corporation in Canada, which sold its newspaper business in the 1990s and invested in information services through a merger with Reuters. Another is Fujifilm, once Kodak’s biggest competitor and now a successful health care, imaging, and materials firm. These are both examples of “real options” thinking, whereby firms reapply existing competencies (Thomson in information services and Fuji in chemicals) in new markets.
Which of these approaches should your business pursue? It depends on your circumstances. For example, a recent study by James Bessen, Erich Denk, Joowon Kim, and Cesare Righi shows that if you have strong assets that the market still values, doubling down on your existing strategy is likely to work out well. If digitization is a threat that you’re not in a good position to counter, moving away into new, defensible areas is probably the smartest choice. There are benefits and risks to each of these strategies.
Can you pursue all four at the same time? That makes sense up to a point. When a new technology or an upstart competitor first comes along, you need to understand the context, do some careful analysis, and consider a full range of options. Take JPMorgan’s response to cryptocurrency: publicly attacking it while joining a consortium of banks to investigate it, and then subsequently investing in it directly. Or Fiat Chrysler’s stance toward electric and autonomous vehicles: partnering with upstarts Aurora and Waymo and forming a consortium with BMW, Intel, and Mobileye while also pursuing a full-blown merger with France’s PSA. In conditions of high ambiguity, hedging your bets makes sense.
But eventually you need to get off the fence. Strategy is by definition a commitment to a course of action that precludes others, and the failure to make a choice can be fatal. This happened at Kodak. When digital photography became viable, the company could have retrenched around its declining but profitable photo and film business (and paid shareholders dividends for another decade) or gone all-in on digital imaging—or, like Fuji, sought new pastures. Instead, a succession of CEOs tried a bit of everything, resulting in confused customers and the premature death of the company.
The UK chain of book and stationery stores WHSmith offers an interesting case study. In the early 2000s it faced the same threat as other brick-and-mortar brands: being disintermediated by the internet. It could have tried to build an online business, and it looked carefully at the opportunity, but it chose to double down on its retail operation. It separated its newspaper distribution and retail businesses, focused on high-traffic locations such as airports and train stations for the latter, and upsold customers on high-margin chocolate bars and bottled water. The net result was 10 consecutive years of increasing profits, even in years when top-line revenues shrank, before a Covid-driven downturn in 2020.
A couple of additional points: First, regardless of which option you choose, you must embrace digital technology to improve operational effectiveness. The global utility Enel, for instance, has a unit, Enel X, that is experimenting with new business models (such as demand management and electric-vehicle charging) that may have huge growth potential but currently represent less than 2% of the parent company’s revenues. Everyone else at Enel is focused on optimizing the existing business and providing its nearly 72 million customers with high-quality service. However, its operations have been bolstered by a behind-the-scenes digital transformation, including new technology in its factories and distribution networks and a reengineering of its internal infrastructure and processes.
Second, each of these approaches sends a very different message to your various stakeholders, and retrenchment in particular is a tough story to sell. (A CEO who says, “We see this new technology coming, but we aren’t capable of responding, so we will retrench around our declining traditional base” isn’t likely to be in the job very long.) So even if you’ve chosen that path, your firm might also need to make a small show of fighting back or doubling down. Many large retail banks are doing this now: They talk up their internal start-up accelerators and venture investments, but behind the scenes they are taking out costs, selling off their most badly affected lines of business, and lobbying regulators to keep fintech companies out of the market.
Choosing Your Path
The lessons that corporate leaders should take from this analysis are straightforward.
First, don’t make generalizations based on anecdotal and high-profile examples. Everyone knows what happened to Kodak and Blockbuster, and we can learn from their stories. But they’re outliers. Some creative destruction has happened in technology, media, and retail. All other major sectors haven’t seen that much, thanks to a range of barriers to entry including high switching costs, economies of scale, trusted relationships, and regulation. It’s important to understand not only the logic of disruptive innovation but also the basics of industry structure and competitive advantage.
Second, judgment beats paranoia. The late Andy Grove used to say that only the paranoid survive; it was his way of keeping everyone alert to the next big threat. Unfortunately, it didn’t help Intel pick up on the exponential growth in smartphone processors in the 2000s. More important, a fixation on disruption gets you into trouble, because when you’re so focused on the risks of coming late to a new technology, you ignore the perhaps greater risk of moving too quickly. Examples abound: Eli Lilly wrote off almost $300 million after an early foray into biotechnology—the acquisition of Hybritech in 1986. GM launched its first mass-produced electric car, the EV1, in the late 1990s but stopped production in the early 2000s after spending around $1 billion. BP was an early mover in renewables but shuttered its alternative energy business in 2011. Then there was Time Warner’s ill-fated merger with AOL, which resulted in a $54 billion write-off. You need to keep two worldviews in mind: the possibility that your company will be disrupted, and the likelihood that it won’t. That will help you make better decisions.
Finally, take the time to make the right choice. The effects of new technologies are usually felt across decades, not years, and most potentially disruptive ones (and the firms behind them) end up coexisting with their established counterparts. The newspaper industry is still in flux—with paper and online versions alongside each other—25 years in. Biotechnology was touted as a potential disruption as early as the 1980s, but it took until the 2010s for the drugs it produced to become blockbusters (and many of them were made by traditional big pharma companies). So instead of plunging forward, play the long game: stay alert, plot scenarios, be proactive, and find the adaptation strategy that best fits your organization’s needs and capabilities.