“A gale force warning to leaders: at the current churn rate, about half of S&P 500 companies will be replaced over the next ten years,” is one of the key insights from the 2018 Corporate Longevity Forecast. The forecast is conducted every two years by Innosight, the innovation consulting firm co-founded by renowned Harvard professor Clayton Christiansen (who sadly died from cancer on January 23). “The 33-year average tenure of companies on the S&P 500 in 1964 narrowed to 24 years by 2016 and is forecast to shrink to just 12 years by 2027.”
Shrinking company lifespans in the S&P 500 is a useful indicator of marketplace turbulence, driven to a large extent by technology disruptions and business model changes. Every year, companies drop off the list for a variety of reasons. They may have run into hard times and their market cap size fell below a certain threshold, - currently around $6 billion; they may have been overtaken by faster growing firms; or they could have ceased to exist as an independent company due to a merger, acquisition or private equity deal.
According to the Innosight Forecast report, a few key megatrends are responsible for the market turbulence behind the changing makeup of the S&P 500.
The Imperative of Dual Transformation
For a startup a transformative innovation is all upside, an opportunity to take-on established companies with new products that offer significantly better capabilities and/or lower costs. But, it’s different for an established company. Over the years, the company has amassed a number of valuable assets and organizational capabilities. Change is often difficult for such companies. Already consumed with managing their existing operations, - e.g., products and services; supply chain and channel partners; sales and customer relationships; revenues, profits and cash; - they may see a new transformative innovation as more of a threat or distraction than an opportunity.
Innosight argues that the right response by an established company to such a disruptive change is a two-track dual transformation process: reposition the existing business to make it more resilient and better able to evolve into the future; and embrace the disruptive change to create tomorrow’s new growth business. To improve its competitive advantage, the company should leverage its unique, difficult-to-replicate assets and capabilities and create new transformative business models.
The Innosight report illustrates such a dual transformation by discussing the changes in the retail industry, one of the most volatile sectors in the S&P 500, where at least 21 US retailers filed for bankruptcy in 2017. “The move to digital channels has been steady and relentless.” US online sales grew from 5% of total retail sales in 2012, to 13% in 2017, and are forecast to rise to 17% by 2022.
“Many brick-and-mortar retailers have adapted and responded to the online opportunity with their own digital channels, and many have transformed by integrating physical and digital commerce around customer experiences. However, such efforts are rarely enough… The complication is that competition in those spaces is much fiercer than in its brick-and-mortar channels - so much so that replacing declining store revenue with online sales is not a recipe for overall growth.” Retailers need to embrace a dual transformation strategy, based on growing their digital business, while simultaneously transforming their core physical business.
Digital technology platforms are driving a massive shift in market value
In 2000, the top five companies by market value were classic industrial age companies: GE, ExxonMobil, Pfizer, Citigroup, Cisco and Walmart. Now, the top five are digital platform companies: Apple, Microsoft, Alphabet, Amazon and Facebook, with Alibaba and Tencent among the top ten. “What these firms all have in common are powerful digital platforms that provide the scale and scope to expand into new growth markets and geographies at speeds never before possible.”
A platform strategy relies on an external ecosystem to generate complementary innovations and business transactions. It’s all about network effects. The more products or services a platform offers, the more users it will attract, helping it then attract more offerings, which in turn brings in more users, which then makes the platform even more valuable. Moreover, the larger the network, the more data is available to customize offerings to user preferences and better match supply and demand, further increasing the platform’s value.
Disruptive change highlights the importance of continual business model innovation
In his 2018 book, Reinvent Your Business Model, Innosight co-founder Mark Johnson argued that a new technology alone, - no matter how transformative, - isn’t enough to propel a business into the future. For an established company, it’s no longer enough to just roll out improved products and services based on its once-reliable business models. The business model wrapped around the technology is the key to success or failure. Business model innovation has long been the domain of disruptive startups looking to compete against established companies by changing the rules of the game, - and, hopefully, creating new markets and reshaping entire industries.
The transportation and tourism industries, for example, have seen dramatic shifts in their business models, partly as a result of disruptive startups like Uber and Airbnb. “As recently as 2015, the leaders of most of the major hotel companies were quoted as saying that the sharing economy had yet to take a measurable chunk of its business away.” However, an increasing number of established companies have embraced the kind of “asset-lite” business model pioneered by Airbnb and Uber, which don’t own real estate or vehicles, but instead focus their digital investments and competitive differentiation on improving the overall customer experience.
The energy sector, one of the world’s largest, is also facing the forces of creative destruction. “The massive shift of investment to renewables has finally reached critical mass, with investment in solar, wind and related grid capacity now surpassing total investment in new fossil fuel resources for the first time, according to the International Energy Agency… It’s why many incumbent energy companies are massively investing in renewables, which requires new business models, new growth strategies, and new organizational capabilities.”
In closing, the Innosight Longevity Forecast offers a few recommendations to help industry leaders turn these turbulent trends into opportunities for future growth:
- Spend time at the periphery. First-hand experience with new products and services is essential, - both online and in the physical world, - to help spot early warning signs of potential major changes.
- Watch out for changing customer behaviors. Changing customer habits and behavior patterns can also be early warning signs that disruptive change is in the horizon.
- Make sure your strategy isn’t trapped by yesterday’s assumptions. With traditional strategies, we can predict likely trends based on extrapolating what is happening in the present. But in fast changing environments, this approach is limiting because the future may not resemble the present. Instead, it’s important to carefully analyze the most promising transformational trends.
- Embrace dual transformation. Transforming the core business is necessary, but not sufficient to sustain growth. Companies need to also look for growth opportunities outside their core business and continually reinvent themselves.
- Assess the cost of inaction. In addition, to looking at the cost of new actions, companies should also estimate the price tag of inaction. “Many of the firms exiting the S&P 500 due to drops in market value can serve not just as cautionary tales but as guideposts for measuring the impact of lost opportunities.”
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