Aany attendance business conference or open any management book and encountering some variation of the same message is almost certain: the pace of change in business is accelerating, and no one is safe from disruption. Recent advances in artificial intelligence (ai) has left many corporate Goliaths calmly anticipating David’s sling, fearing that they could meet the same fate as companies such as Kodak and Blockbuster, two giants brought down by the digital revolution.
“The Innovator’s Dilemma”, a seminal book written in 1997 by management guru Clayton Christensen, observed that owners are reluctant to pursue radical innovations that would make their products or services cheaper or more convenient, lest they deny the profit of the businesses they have. . In the midst of technological chaos, that creates an opening for countless upstars with such considerations. But the truth is that America Inc. has experienced very little competitive disruption during the Internet age. Owners seem to have become more secure, not less. And there is good reason to believe that they will remain at the top of their perch.
Consider the Fortune 500, America’s largest companies by revenue, from Walmart to Wells Fargo. Accounting for about one-fifth of employment, half of sales and two-thirds of profits, they are the backbone of corporate America. The Economist has examined the age of each company, taking into account the mergers and other results that give a youthful picture of the group.
We found that only 52 of the 500 were born after 1990, our benchmark for the Internet era. That includes Alphabet, Amazon and Meta, but misses Apple and Microsoft, middle-aged tech titans. Only seven of the 500 were created after Apple released the first iPhone in 2007, and 280 were before America’s entry into World War II (see table 1). In fact, the rate at which new corporate behemoths are rising has been slow. In 1990 there were only 66 companies in the Fortune 500 30 years old or younger and since then the average age has increased from 75 to 90.
One explanation is that the digital revolution has not been so revolutionary in some parts of the economy, notes Julian Birkinshaw from the London Business School. Communication, entertainment and shopping are turned on their heads. But extracting oil from the ground or sending electricity down wires looks mostly the same. High-profile flops like WeWork, a much-hyped office-sharing company are now in danger of collapse, and Katera, a one-time failed unicorn that tried to redefine the construction industry by ‘ the use of prefabricated building components and fewer middlemen, has discouraged others from trying to disrupt their own businesses.
Another reason is that inertia has slowed the pace of competitive upheaval in many industries, buying time for incumbents to adopt digital technologies. Although 65% of Americans now bank online, almost all the banks they use are ancient – the average age of those in the Fortune 500, taking a including JPMorgan Chase and Bank of America, 138. Less than 10% of Americans changed banks last year, according to Kearney, a consultant. That establishment has made it difficult for potential insurgents to build scale before regulators imitate their tactics. A labyrinthine regulatory system that favors large institutions with well-staffed compliance departments also contributes. The insurance industry, also dominated by geriatric giants like at and MetLife, much the same.
The pattern is not unique to financial services. Walmart, America’s most powerful retailer, almost missed the e-commerce boom. David Glass, its chief executive in the 1990s, predicted that online sales would never surpass his single largest retail warehouse, according to a recently published book, “Winner Sells All ”, by Jason Del Rey, journalist. However, Walmart’s financial strength and large customer base allowed it to later change course. Only Amazon now sells more online in America. The recent growth of electric vehicles from Ford and General Motors, America’s two largest car manufacturers, offers another example. Their large balance sheets have allowed them to pour in large sums of money to restart their businesses at a time when raising capital is becoming increasingly difficult for newcomers.
A third explanation for the persistence of American owners is that their scale creates a momentum of their own around innovation. Joseph Schumpeter, the economist who coined the phrase “creative destruction”, first argued that economic progress was driven mainly by new entrants, noting in “The Theory of Economic Development”, a book published in 1911, “railroads are generally not built by the owner of stage coaches”. By the time Schumpeter published “Capitalism, Socialism and Democracy”, his magnum opus in 1942, he had changed his mind. It was, in fact, large companies – monopolies, even – that drove innovation, thanks to their ability to invest in research and development (r&d).
America’s tech titans offer the amazing picture. Alphabet, Amazon, Apple, Meta and Microsoft invested a combined $200bn r&d last year, equal to 80% of their combined profits and 30% of all r&d consumption by listed American companies. Less obvious examples abound, too. John Deere, America’s largest agricultural equipment company, founded in 1837, is leading the way in recent innovations such as driverless tractors and smart sprayers that use machine learning to detect weeds and focus. Its goal is to make farming completely independent by 2030, says Deanna Kovar, chief executive of the company. It has been poaching tech geeks from Silicon Valley and now employs more software engineers than mechanical ones.
Incumbents and newcomers also often play a supporting role in innovation. William Baumol, an economist, wrote in 2002 of a “David-Goliath symbiosis” in which radical developments are generated by independent innovators and then reinforced by established companies. A 2020 paper by Annette Becker from the Technical University of Munich and co-authors of the r&d split a sample of companies into its two components – the more exploratory “research” and the more commercially oriented “development” – and found that the relative weight of research decreased with company size. Likewise, a 2018 paper by Ufuk Akcigit of the University of Chicago and William Kerr of Harvard Business School found that the patents created by large companies were less radical and more focused on incremental improvements to existing products and processes.
That division of labor may help explain why many start-ups are bought by established companies. With John Deere’s 2017 acquisition of Blue River, a startup, it brought the technology behind the smart weed sprayer, which it was then able to sell through its large network of distributors. Over the past decade, 74% of venture capital “exits” in America were through such acquisitions, according to PitchBook, a data provider (see table 2). That’s up from the next thing in the 1980s, leading to warnings of a plague of “killer spells”, with big companies eating their future rivals.
Cases like this do happen, but they are very rare. A 2021 study by Colleen Cunningham, then at the London Business School, and co-authors found that 5-7% of purchases by pharmaceutical companies, which rely heavily on startups to boost drug pipelines, were look suspicious. Most of the time, folding into an established giant is simply the most effective way for an innovative new company to bring its innovations to the world.
A final explanation for the lack of competitive unrest in corporate America has to do with demographics. “Young companies are usually built by young people”, notes Iain Van Reenen from the London School of Economics. Between 1980 and 2020 the share of the American population between 20 and 35 fell from 26% to 20%. The rate of new business creation fell from 12% to 8% over the same period (see table 3). In a 2019 study comparing differences in population growth and new business creation across states in America, Fatih Karahan of the Federal Reserve Bank of New York and co-authors concluded that population growth a ‘ fall up 60% of the decline in the level of business entry over it. the past four decades.
Application rates for starting new businesses in America rose in late 2020 after falling in the early months of the covid-19 pandemic, and have since remained well above pre-pandemic levels. That entrepreneurial explosion has focused heavily on hospitality and retail, which have been hit by the pandemic, and over time may peak, especially as household savings are squeezed with the pandemic, declining. Optimists will hope that the amount of investment will be there recently ai beginners can maintain the momentum. Even if it does, the corporate giants of the past may remain ahead. ■
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