Fortune 500 Extinction

Be aware of the fragility of companies no matter how powerful today.

Fortune 500 Firms in 1955 vs. 2011; 87% Are Gone.

What do the companies in these three groups have in common?

Group A. American Motors, Studebaker, Detroit Steel, Maytag and National Sugar Refining.

Group B. Boeing, Campbell Soup, Deere, IBM and Whirlpool.

Group C. Cisco, eBay, McDonald’s, Microsoft and Yahoo.

All the companies in Group A were in the Fortune 500 in 1955, but not in 2011.

All the companies in Group B were in the Fortune 500 in both 1955 and 2011.

All the companies in Group C were in the Fortune 500 in 2011, but not 1955.

Comparing the Fortune 500 companies in 1955 and 2011, there are only 67 companies that appear in both lists. In other words, only 13.4% of the Fortune 500 companies in 1955 were still on the list 56 years later in 2011, and almost 87% of the companies have either gone bankrupt, merged, gone private, or still exist but have fallen from the top Fortune 500 companies (ranked by gross revenue). Most of the companies on the list in 1955 are unrecognizable, forgotten companies today. That’s a lot of churning and creative destruction, and it’s probably safe to say that many of today’s Fortune 500 companies will be replaced by new companies in new industries over the next 56 years.

What Causes Corporate Decline According to Steve Jobs

Update: Here’s a related article from Steve Denning in Forbes, featuring some insights from Steve Jobs about what causes great companies to decline (power gradually shifts from engineers and designers to the sales staff) and how the life expectancy of firms in the Fortune 500 and S&P500 has been declining over time.

Also, the impending death of a big-box retailer, Best Buy: http://www.forbes.com/sites/larrydownes/2012/01/02/why-best-buy-is-going-out-of-business-gradually/

Peggy Noonan On Steve Jobs And Why Big Companies Die

There is an arresting moment in Walter Isaacson’s biography of Steve Jobs in which Jobs speaks at length about his philosophy of business. He’s at the end of his life and is summing things up. His mission, he says, was plain: to “build an enduring company where people were motivated to make great products.” Then he turned to the rise and fall of various businesses. He has a theory about “why decline happens” at great companies: “The company does a great job, innovates and becomes a monopoly or close to it in some field, and then the quality of the product becomes less important. The company starts valuing the great salesman, because they’re the ones who can move the needle on revenues.” So salesmen are put in charge, and product engineers and designers feel demoted: Their efforts are no longer at the white-hot center of the company’s daily life. They “turn off.” IBM [IBM] and Xerox [XRX], Jobs said, faltered in precisely this way. The salesmen who led the companies were smart and eloquent, but “they didn’t know anything about the product.” In the end this can doom a great company, because what consumers want is good products.

Don’t forget the money men

This isn’t quite the whole story. It’s not just the salesmen. It’s also the accountants and the money men who search the firm high and low to find new and ingenious ways to cut costs or even eliminate paying taxes. The activities of these people further dispirit the creators, the product engineers and designers, and also crimp the firm’s ability to add value to its customers. But because the accountants appear to be adding to the firm’s short-term profitability, as a class they are also celebrated and well-rewarded, even as their activities systematically kill the firm’s future.

In this mode, the firm is basically playing defense. Because it’s easier to milk the cash cow than to add new value, the firm not only stops playing offense: it even forgets how to play offense. The firm starts to die.

If the firm is in a quasi-monopoly position, this mode of running the company can sometimes keep on making money for extended periods of time. But basically, the firm is dying, as it continues to dispirit those doing the work and to frustrate its customers.

As the managers find it steadily more difficult to make money playing solely defense, they become progressively more desperate and start doing ever more perilous things, like looting the firm’s pension fund or cutting back on worker benefits or outsourcing production to a foreign country in ways that further destroy the firm’s ability to innovate and compete.

There is another way

What’s interesting is that Steve Jobs lived long enough to show us at Apple [AAPL], in the period 1997-2011: what would happen if the firm opted to keep playing offense and focus totally on adding value for customers? The result? The firm makes tons and tons of money. In fact, much more money than the companies that are milking their cash cows and focused on making money. Other companies like Amazon [AMZN], Salesforce [CRM] and Intuit [INTU] have demonstrated the same phenomenon and shown us that it’s something that any firm can learn. It’s not rocket science. It’s called radical management.

Fifty years ago, “milking the cash cow” could go on for many decades. What’s different today is that globalization and the shift in power in the marketplace from buyer to seller is dramatically shortening the life expectancy of firms that are merely milking their cash cows. Half a century ago, the life expectancy of a firm in the Fortune 500 was around 75 years. Now it’s less than 15 years and declining even further.

The above articles are yellow flashing lights on the longevity of competitive advantage for established companies.  Do you agree with the article’s premise?

11 responses to “Fortune 500 Extinction

  1. John, as usual, you post very thought-provoking questions. I don’t think I’m quite up to the task of providing a good answer.

    As regards group A, that’s easy: none of the companies had barrier to entries.

    Group B is a toughie. You’ve stumped me. I don’t know why, for example, Whirlpool would be in group B, but Maytag is in group A. Whirlpool does have some brand recognition, but I don’t think it means too much. Perhaps I could say that group B has a moat. Boeing has significant development costs, which are very costly to replicate. Beoing seems to be in a “oligopoly”, where it’s very difficult to get scale to compete. I just had a look at Wikipedia’s entry for Airbus. It was formed as a consortium of European aviation firms to compete with American encumbants. Campbell soup has the moat of “mindshare”. I heard someone say that Campbell’s moat might be contracting, as people are losing interest in soup. Deere’s moat is its distribution of dealerships. As it turns out, I live in a farming community in Scotland, and there is indeed a Deere’s. The community is small. there’s a limited demand for farm machinery, so any competitor would have a very difficult task ahead of them getting scale.

    IBM. Well, I don’t know about them. They clearly used to have a monopolistic position, but now they just seem to be a consultancy firm. Mary Buffett rant time. She recently gave an interview (http://bit.ly/wmZc08) where, predictably, she plugged her latest book, and lauded Warren’s purchase in IBM. All the talismanic phrases were used: “consumer monopoly”, “branded”, “buying back it’s own stock”. Everyone can be a pundit! I think IT consultancy is a very cut-throat business, though. They’ll be plenty of competitors at whatever scale you’re looking at (say, EDS, Accenture, there must be others), and contracts are run by competitive tender. So I think that the case for IBM is weaker than Mary is stating. The fact that Warren bought into it almost certainly means that my analysis is wrong somewhere, though.

    Group C, their common thread seems to be that they caught a “wave”. McDonalds caught the franchising wave. Microsoft caught the PC wave, and the others caught the internet wave. Microsoft and Yahoo are both “cloners”. It’s worth remembering that Yahoo stands for “Yet Another Hierarchical Officious Oracle”. It looks pretty vulnerable, actually. eBay has the network effect. Microsoft has “stickiness”. In order to compete, you have to do the same thing that Microsoft does, only why would anyone buy it, when there’s already Microsoft. Microsoft is not invulnerable though. With programs like Firefox, and an increasing use of the web, the OS is becoming less relevant. There’s also things like smartphones, where traditional Windows doesn’t fit. So there are chinks in Microsoft’s armour, and it’s moat, whilst still large, is getting narrower.

    But I’m sure you’ve got the “real” answer.

  2. Mark,

    I think he provided the answer right below the question, but maybe the question was much more profound than I realized in which case your further attempts to answer it are well-done.

    John,

    Something I noticed about all of these companies is they make their own “things”, they aren’t in the business of reselling/distributing other people’s things (retail). I am wondering how many Fortune 500 companies produce their own “things” (goods, services) and how many are connected to retail? My mind is blanking right now on specifics but I am thinking that of most of Buffett’s/BRK’s holdings, they’re all selling their own things rather than retailing those of others, which would seem obvious given Buffett’s penchant for strong brands.

    I was going to say “Maybe retailing is not a business model that is likely to produce long-term value creation for the investor” but then I realized you just mentioned WMT in your latest posts and the chart on that company would seem to argue otherwise. But perhaps WMT is the exception to the “retail rule”?

    I think I’m grasping at straws here and either way it’s a bit more complicated than “retail has a weak moat” but it was just something that came to mind so I thought I’d ask about it.

    • I think in general retail has no Moat, but Buffett has invested in several retailers both successfully (Mrs. Bees Furniture Store in Omaha, Jewelry store) and not so successfully (Diversified Retailing in Baltimore).

      Yes. Wal-Mart is an exception, but why do you think Starbucks is so successful–do you notice something odd? Starbucks within 4 blocks of each other.

      • What’s interesting about the Omaha furniture store is it has a kind of moat– it’s the dominant furniture retailer in its market and so far it looks like the Internet has not fully revolutionized the furniture market. It’s a different kind of retail foray, than, say, BBY. Which, by the way, I think is always an interesting question to ask when considering any particular investment thesis, that being, “Besides it not being ‘cheap enough’, why wouldn’t Warren Buffett buy this company?”

        As for SBUX, I see them as different from BBY in a fundamental sense because even though they maybe don’t grow their own coffee, people see it as “Starbucks coffee”… it’s not some other company’s coffee, sold by Starbucks. It is “Starbucks coffee”, implying unique quality, taste and value. BBY is selling Maytag washers, MSFT video games, SNE televisions, etc.

        Why is SBUX so successful? Well, I am sure this question has been studied and researched quite a bit, so I could search around the web for what other’s have suggested before taking a stab, but I think the point of the exercise is to get my own creative juices flowing so I’ll attempt a go without that aid first time around: part of it has to do with the fact that they sell an addictive product, but so did tobacco companies and there were many contenders in that space.

        I don’t know anything about their supply efficiencies and other operational advantages and I assume you’re question wouldn’t require knowledge of that to answer, that you’re looking more at something unique to their relationship with customers.

        Best I can come up with right now is they created something “institutional” and prestigious for their consumers. They made them feel like carrying around their product in their hand added some sophistication and class to their life, and they did it all while providing something that people generally enjoyed and found to be high quality. I don’t know how important their ability to turn Starbucks into hangout/study halls is to their success but I am guessing that plays a role as well.

        • I don’t know if I have the answer for SBUX’s success. But I am observing the density of their stores. We would need to dig into their financials and do an industry map.

    • “I think he provided the answer right below the question”

      I had assumed that he was making an observation, but real the question is what is it that puts them in each group – apart from the obvious like Microsoft didn’t exist in 1955.

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