This post has been on my mind for ages. In it, I will show how digital distruption and its destructive effect on companies is overblown, misunderstood and uncritically rehashed by lazy keynote speakers and authors.
Let’s get started. Heard this one before?
“Digital is the main reason half of the Fortune 500 have disappeared since 2000”.
What about “Half of the S&P 500 Companies Will Be Replaced in the Next Decade”
Or maybe “Digital disruption will wipe out 40% of Fortune 500 firms in next 10 years”
Wipe out for God’s sake! If you’re the CEO, you’ve gotta be trembling!
Maybe you’ve even seen a graph like this once or twice? Or if you’re like me, 10+ times…
After getting this stuff fed many times in articles, LinkedIn and conferences, I couldn’t help but wonder… If there’s so many companies just being wiped out all around us, why the hell does everyone keep bringing up Kodak and Blockbuster again and again and again?
Is it because we’re just lazy here, or is it because the claim is wildly overblown? Let’s dig deeper and find out.
Getting into the data…
Most people are of course too cool to put sources on claims and data like these, but the ones that do tend to point to some studies done by Ray Wang on the Fortune 500 and a company called Innosight on the S&P 500. Ray is the more outspoken of them, and also wrote the “Disrupting Digital Business” book based on some of this work. The conclusion there is very clear: “Digital Disruption Has Demolished 52% of the Fortune 500 Since 2000”.
Now given that both Innosight and Ray Wang makes a living consulting off this stuff, we may want to apply some basic source critique. It is of course in their interest to inflate the claims. We can also test the theory a bit in recent practice. If 40% of the Fortune 500 are predicted to be demolished by digital disruption in the next 10 years, that’s around 20 companies per year. We can easily check if those predictions are holding up.
Even a very quick glance at the data suggests that it simply doesn’t check out. Here’s a list with some of the last two years of Fortune 500 list dropoffs and the reasons given by Fortune 500 themselves. I have summarized the reasons, but you can go check them out yourself here and here. Note that in these past two years, only 44 companies in total fell off the Fortune 500, so for the destructive prophecy to ring true, basically all of them would have to be due to digital disruption. Here we go:
- KKR, a private equity firm, fell off due to some poor performing bets in oil exploration
- Hess, a petroleum refiner, fell off due to falling oil prices
- Trinity Industries, railway and construction business, fell off due to lower demand
- Commercial Metals, processes scrap metal. Fell off due to oil prices falling.
- Barnes & Noble, chain of book stores. Falling revenues due to Amazon. Still somehow a $4.4bn company.
- Peabody Energy, coal company. Lower revenues due to lack of demand and warm winter.
- Visteon, automotive supplier. Sold a subsidiary and is no longer big enough.
- NiSource, natural gas. Spun off a division.
- Domtar, paper distributor. ASP declining.
- Navient, student loans. Regulation pressure.
- Caesars Entertainment, gambling and hotels. Legitimately bankrupt, from what I can see the only real “death” in the Fortune 500 in the past two years.
As you can see, the vast majority of changes in the Fortune 500 are due to M&A, competitive situations worsening, macroeconomic trends, oil prices and stuff like that. Barnes & Nobles is the only real “traditional” company that is being “disrupted” by Amazon that I could find in the recent lists.
Looking at the newcomers to the Fortune 500, the only ones you could kind of argue are driven by digital disruption are Tesla and Paypal (but the latter due to it being split from eBay and now being its own company). So really, Tesla. Here’s a good list from 2017.
I repeat: In the last two years, the only companies changing in/out of Fortune 500 even remotely related to digital disruption is Barnes & Nobles and Tesla. Tesla is even a bit of a stretch to classify as a digital disruptor.
Now, I would of course love to go through the entire Fortune 500 history of the last 20 years and do the same work (yeah, maybe not). Fortunately some friendly souls from the Kaufmann foundation have done a more in-depth report on this. Their conclusion is that the main driver of change in the Fortune 500 was adding service companies to the list in the 90’s and a M&A boom in the same timeframe. The 2000’s have actually had less change in the Fortune 500 than the past, and is comparable with the 60’s. And as we’ve seen from the last couple of years, this trend of lower turnover has continued.
In conclusion: The last couple of years have seen lower turnover in Fortune 500 than the historical mean. And of the companies that change, only a couple at most can be attributed to digital disruption.
So where are we, really?
Want an updated chart? Here you go:
Not shown on the chart above is the latest year — 2018. Oops, it’s a another low one — just 17 newcomers in 2018 and a total turnover of 25 (there’s a fair bit returning each year).
What about the S&P 500 then? First of all, it’s a terrible measure of anything, since S&P 500 is not really objective, but a big index managed by Standard & Poor. The way they manage that index has changed a whole lot over the years as you might expect (in the 50’s it was only industrial companies) which of course makes any kind of comparison with 70 years ago pretty irrelevant. So anyway, did the projections hold up? Are half of the S&P 500 being wiped out due to digital disruption these days?
Oops, same trend. The average company tenure is longer than it was in the 80’s, and the trend is actually that tenure is increasing since the .com bubble burst.
The final fallacy in this data jumble is of course the cherry picking of the extremely narrow view of the S&P 500. If you look at most other stock indices, they are managed differently and the average tenure or age is much, much longer. The average age of a company on the danish C20 index is over 90 years, as an admittedly biased example.
What does it all mean?
Disruption used to be a really meaningful and narrow theory developed by Clayton Christensen on low-end and new market disruption. I really encourage anyone interested to read the original source there or a recent recap. Over the last decades it morphed into basically any kind of changing competitive situation. Then recently, a few misleading graphs and studies done by agents with their own motives totally blew it out of proportions, and now everyone is worried about getting disrupted or fearmongering at conferences. But the data does not check out. There is simply not a wave of destruction going on, and any strategy or argument starting with that assumption, is bound for failure. Much less are the changes in the S&P 500 or Fortune 500 caused by digital alone, but by many different trends.
The changes brought on by the internet, connectivity, mobile, social, cloud etc. are all real and meaningful and should be a part of everyones mindset and strategic thinking. But most of the changes are additive, not destructive, and if you’re a large company today, you have all chances in the world to act on these opportunities without fear of being “disrupted” from one day to the other. If you are truly being disrupted in the classical sense, chances are you are too late, but 90%+ of us are not, and for us, digital is nothing but opportunities we can go for or ignore, just like any other opportunity out there.
I hate to put on my old-man hat like this, but I hate even more when bullshit spins off into the stratosphere. That has definitely happened with “digital disruption”. Fear, wild exaggeration and misleading information is not only wrong in and of itself, but it takes our eyes and focus away from delivering on what really matters.