The lifespan of large and successful companies, some of them global icons, has never been shorter. According to research on the average tenure of companies listed in the S&P 500 index, the average tenure in 1969 was 64 years. By 2015 it has dropped to 20 years and will slide further down to 12 years by 2027. Although the cyclical movements of companies entering and exiting the index seem to mirror economic fluctuations, there is a clear downward trend suggesting that half of S&P 500 companies will be replaced over the next decade (Anthony S et al., 2018). What’s been happening here is quite indicative of the unprecedented disruption faced by companies across almost all sectors and regions. Traditional competitive advantage that used to provide businesses with a defensible position, may no longer be so secure today. The competitive environment currently is just far more unpredictable than a mere decade ago.
Disruption from all angles
Disruption in most instances may not only threaten the very existence of a single company but may very well lead to the decline of an entire industry. Fæste et al. (2014) shows how businesses are facing growing disruption from all angles.
Increased volatility: – More intense competition and costly, extreme events (e.g. financial crises, global warming) are causing more turbulence.
Digital disruption: – Across industries, digitization is fundamentally shifting how individuals interact, what customers expect and how work is done.
Increasing regulation: – As the number and complexity of regulations increases across markets, planning and operations become more difficult.
Geopolitics: – Increasingly complex geopolitical situations are forcing global companies to shift how they think about risk.
Public spending pressure: – Rising costs across most aspects of government create pressure to trim budgets, cut programs, or both.
Manufacturing economics: – Volatility in logistics and labour costs, and supply chain complexity are changing the formula for where to manufacture and what to outsource.
Energy dynamics: – The global energy landscape is dramatically shifting owing to geopolitical issues, technology advances and changing sources.
Two-speed world: – Companies must be able to shift gears between different approaches to compete in low-cost countries and developed economies.
Taking cognisance of the 360 degrees disruption facing businesses today, we must also understand the present day global economy as an organic and dynamic process – which is in stark contrast with the static equilibrium models of the past. According to Joseph Schumpeter equilibrium is not the end goal of market processes – instead, many fluctuating equilibria are constantly reshaped or even replaced by dynamic innovation and competition (Investopedia & Cabalerro n.d.). At this point it may become necessary to introduce the concept of creative destruction, a term appearing in the title and the body of the Innosight report (see references). It basically implies the process of entrepreneurs and technologies actively creating disequilibrium, highlighting new profit opportunities that have not previously existed. And, according to Anthony S et al. (2018), very few companies today are immune against the forces of creative disruption!
The imperative to change
Fæste et al. (2014) argues that in the face of this complexity and volatility there is, more than ever before, an imperative to change. Organisational transformation means “a comprehensive change in strategy, operating model, organisation, people and processes. In fact, forward-thinking companies are launching pre-emptive transformations while they still hold a dominant position – retooling themselves to stay ahead”. At this point I would like to postulate that companies as early as during its growth phase, should already start thinking of change and transformation – thereby keeping pace with today’s everchanging, dynamic business landscape. Waiting for its maturity phase before transformation is considered, what for example the automotive, petroleum, tobacco and telecommunications industries have done, may be considered too myopic. After all, Bertolini et al. (2015) makes it clear that no business will survive over the long term without reinventing itself.
We find ourselves in a rapidly changing business environment where a shrinking S&P 500 company tenure may be indicative of increasing volatility and turbulence. Traditional competitive advantages are becoming less secure, with growing disruption setting in from all angles. Creative destruction is accelerating, which on the one hand pose existential threats to some businesses, while on the other may present opportunities for profit which never existed in the past. There is an imperative for companies to change and reinvent themselves, more than ever before!
Anthony, S., Viguerie, S., Schwartz, E. & Van Landeghem, J. (2018) 2018 Corporate longevity forecast: creative destruction is accelerating. Innosight Holdings LLC.
Bertolini, M., Duncan, D. & Waldeck, A. (2015) Knowing when to reinvent. Harvard Business Review: December 2015.
Cabalerro, R. (n.d.) Creative destruction. MIT Economics. Available from: https://economics.mit.edu/files/1785 [Accessed on: 13 May 2018]
Fæste, L., Hemerling, J., Keenan, P. & Reeves, M. (2014). Transformation. The imperative to change. The Boston Consulting Group.
Investopedia. Creative destruction. Available from: https://www.investopedia.com/terms/c/creativedestruction.asp [Accessed on 14 May 2018]