For many people, the most fascinating part of the annual Fortune 500 list is spotting the losers. While some companies rise up the list, others slip or disappear altogether. In the newest batch, released last week, Caesar's Entertainment, Alcoa, American Airlines, J.C. Penney and Sears all gave up ground, while Coach and Big Lots vanished.
As former corporate giants like American Motors, Studebaker, American Can and RCA can also attest, the leader board of America's biggest corporations can change quickly. To top executives, this represents the omnipresent threat of "disruption," an idea that has become so ingrained in some corporate circles that it is almost like a religious belief, with MBA programs, books and conferences all counseling business leaders to “disrupt or be disrupted.”
In fact, in a poll by Fortune magazine of the list’s 500 chief executives, the largest group, 72 percent, named “the rapid pace of technological innovation” as their company’s greatest challenge.
Yet a closer look at the history of the Fortune 500 suggests disruption is not now as big of a force as many people think, especially for America's largest companies. As Alan Murray of Fortune writes, 57 percent of the Fortune 500 disappeared between 1995 and today. That's not a very big increase from the list’s first two decades, when 45 percent of companies disappeared between 1955 and 1975.
In fact, academic research suggests that the playing field for America’s largest companies may actually be more stable than it has been in decades. Turnover among the Fortune 500 was lower in the 2000s than in either the 1990s or 1980s. Meanwhile, these massive companies are more vital to the U.S. economy than ever. In 2014, the Fortune 500 companies together had revenue that equaled 71.9 percent of U.S. gross domestic product, up from 58.5 percent in the 1990s and 35 percent in 1955.
Dane Stangler, the vice president of research and policy at the Kauffman Foundation who has studied historical trends in Fortune 500 companies, says that while the list provides a meaningful window into American capitalism, most people don't interpret it correctly.
“There is lots of talk about creative destruction and the entrance of new companies, and that's all certainly going on," he said. "But it also remains true that today's big companies can actually be bigger and more far-reaching in scale than the big companies of the past. This is true for employment, and it's true for their importance in the economy."
Disrupt or be disrupted
It may seem like businesses throughout time would have been worried about disruption, in some way or form. But it wasn’t until the mid-1990s that a Harvard Business School faculty member named Clayton M. Christensen popularized the idea of technological change as both a risk and an opportunity under the mantle of “disruptive innovation.”
Then as now, disruption was a deeply unsettling idea for established companies, which is partially why it attracted so much attention. As New Yorker staff writer Jill Lepore writes in a scathing critique of the theory:
As Christensen saw it, the problem was the velocity of history, and it wasn’t so much a problem as a missed opportunity, like a plane that takes off without you, except that you didn’t even know there was a plane, and had wandered onto the airfield, which you thought was a meadow, and the plane ran you over during takeoff.
Christensen's theory took off in the 1990s because it captured the dynamics of the decade. The rise of the Internet created the very kind of technological shift that gave small, innovative start-ups the chance to overthrow more established giants. Big, successful companies like Xerox and the Digital Equipment Corporation woke up to find themselves wandering around the airfield, at risk of getting run over.
That threat of disruption is obviously still relevant, remaking industries as diverse as taxis, newspapers and department stores. Yet research suggests that it may have less relevance to changes in the Fortune 500 than many may think.
Stangler's research shows that turnover — the proportion of companies entering in and falling out of the 500-strong ranking — has generally trended upward in past decades, but only very gradually, as the chart below shows. Turnover increased in the 1980s and 1990s, but by the 2000s it had fallen back to a level on par with the 1950s.
Stangler's work suggests that technological disruption and the rise of new entrants is not the major factor in changes among the Fortune 500. The far more meaningful one is decisions by company management to carry out mergers and acquisitions. Based on his research, nearly two-thirds of the companies that exited the Fortune 500 in the 2000s left because of M&A transactions.
In fact, if you follow the history of many of America's great bygone companies, they live on as part of other corporate giants. RCA was acquired by General Electric in 1985, and American Motors was acquired by Chrysler in 1987, while American Can merged with another company that was eventually bought by Citigroup.
Some mergers and acquisitions happen because of technological disruption, but they also happen for a wide variety of other reasons. In the 1980s, for example, changes in antitrust law, deregulation and other factors made it profitable to split companies apart. In the 1990s, the information technology bubble fueled a wave of M&A, with computer software, supplies and services companies snapping each other up.
Decisions by company management to take a firm public or private also play a role, since the Fortune 500 list only includes public and closely held companies for which revenue information is publicly available. For example, MasterCard, which was formerly organized as a cooperative of banks, joined the list in 2006 as its management teams finally decided it was time for an IPO, says Stangler.
And part of fluctuation in the Fortune 500 list is just meaningless noise, says Stangler. Some is due to methodology, how companies are classified. In addition, a lot of the changes are just meaningless churn in the bottom of the list, with companies naturally rising above and falling below the 500 mark.
“I think [most people's] turnover numbers are vastly overblown," Stangler said. "First of all, a lot of people calculate it wrong. ... Two, I think the reasons behind it have much more to do with M&A cycles than technological disruption.”
Good for Goliath, but what about everyone else?
For all the buzz about start-ups and small business in America, the massive corporations of the Fortune 500 are actually more important to the economy than ever. Taken together, the 500 companies on the most recent list earned $12.5 trillion in revenue and $945 billion in profits in 2014 and employed 26.8 million people worldwide – a little larger than the population of Australia.
Instead of focusing on the churn among the Fortune 500 list, you could actually see it as remarkable for its stability. Since the list was started in 1955, only three companies have held the No. 1 spot — General Motors, Exxon Mobil and Wal-Mart. And there are still 57 companies that have been on the Fortune 500 list since its inception, including Procter & Gamble, Hershey, PepsiCo, Exxon Mobil and Chevron. Among other factors, changes in antitrust law and deregulation have helped to shield big companies against upstarts.
Despite all the focus today on start-ups, small businesses and disruption, the overall corporate landscape is actually more stable than it has been in decades. For example, new research from George Mason University (which looks at all companies in America, not just the Fortune 500) shows that new company start-ups and failures ("exits") have gradually decreased since the 1980s. Job creation and destruction also slowed substantially in the same period, a sign that the corporate landscape is less dynamic than it was several decades ago.
As a result, U.S. companies have gotten, on average, older, according to Stangler's research. In 1982, 1 in 5 people were employed in a company that was five years old or younger. By 2009, that proportion had fallen to 1 in 8.
Although politicians often talk about the importance of small business creation, most American jobs don’t come from start-ups. As research from George Mason points out, half of all jobs generated by newly formed companies disappear after five years. Wal-Mart alone employs 2.2 million people, including 1.3 million Americans.
This rigidity of the corporate landscape is not necessarily a good thing. As Justin Fox writes in the Atlantic, most metrics of corporate dynamism and upheaval have been declining in the U.S. for decades, especially after 2000. As corporate dynamism has declined, so has productivity growth, which is the main driver of standards of living. The newest U.S. government data shows a worrying drop in productivity growth in the first three months of 2015.
No one knows for sure why this is happening. As Fox writes, it could be because the innovative companies of today, like Uber and WhatsApp, just don't require that many employees to operate. It could also be a result of excessive regulation, or that U.S. companies have become less effective and entrepreneurial, or merely because we are awaiting the next transformative round of technological change.
Whatever the cause, the result is that Fortune 500 companies are more shielded from disruption today than they have been in decades.