Firm Turnover and Competition





Fortune 500 Turnover


We find that, while annual turnover on the list has, on average, increased since the early 1980s, it doesn’t quite mean what many people think it means.

It’s easy to paint a narrative around these numbers that coincides with the Great Moderation and the productivity revolution of the 1990s and early 2000s. But reality isn’t so simple.

1. Turnover among big companies is not a new phenomenon.

The late 1950s, as mentioned, experienced moderately high levels of turnover (at least compared to subsequent periods). Prior research has revealed considerable churn among big companies in the early decades of the twentieth century as well.

2. Higher turnover in the 1980s did appear to reflect value creation as corporate conglomerates, ravaged by inflation and competition, were taken apart and remade into separate, more efficient companies.

But, in the 1990s, higher turnover reflected (a) methodological changes in how the Fortune list was compiled, and (b) a mergers and acquisition boom, concentrated in a handful of sectors, that destroyed perhaps as much value as it created. /Turnover is less a broad economic trend than a discrete temporal and sectoral phenomenon


Fortune 500 changes reflects:

1.a kaleidoscopic process of sectoral change and greater efficiencies at the level of individual firms

2. some less sanguine economic developments, which includes the downside of higher volatility—the high M&A volume in the late 1990s included the largest number of the worst deals of the past thirty years—and the deleterious implications for consumers and households.

3. it appears as if performance among the Fortune 500, as measured by return on equity, did not necessarily improve and, if anything, became more volatile over time.


Schumpeter’s ghost: Is hypercompetition making the best of times shorter?

At the center of Schumpeter’s theory of competitive behavior is the assertion that competitive advantage will become increasingly more difficult to sustain in a wide range of industries.   (recently resurfaced in the notion of hypercompetition.)

This research examines two large longitudinal samples of firms to discover which industries, if any, exhibit performance that is consonant with Schumpeterian theory and the assertions of hypercompetition.

We find support for the argument that over time competitive advantage has become significantly harder to sustain and, further, that the phenomenon is limited neither to high technology industries nor to manufacturing industries but is seen across a broad range of industries.

We also find evidence that sustained competitive advantage is increasingly a matter not of a single advantage maintained over time but more a matter of concatenating over time a sequence of advantages.


Update 2017/9/28

America’s Top 50 Companies 1917-2017


The Fall, Rise and Fall of Creative Destruction
What’s the lifespan of a company in the age of startups and tech disruption? Longer than it used to be.

the 5 most valuable corporations of today (by market capitalization, not assets) were all founded in 1975 or later, three of them since 1994 → there has been some creative destruction going on (Joseph Schumpeter “Capitalism, Socialism and Democracy” )
→  whether there is more or less of it happening than in the past
[+] In the business community, especially in and around Silicon Valley, there is a widespread belief that we live in an age of mind-boggling economic upheaval and change.
[-] but economists have been churning out research for several years now that seems to show a decades-long slowdown in almost every indicator of business dynamism.

(E.g.:  “Declining Business Dynamism: Implications for Productivity?” + “The Secular Decline in Business Dynamism in the U.S.” by Ryan A. Decker, John Haltiwanger, Ron S. Jarmin and Javier Miranda; “Declining Business Dynamism in the United States: A Look at States and Metros” by Ian Hathaway and Robert Litan; + “The Rise of Market Power and the Macroeconomic Implications” by Jan De Loecker and Jan Eeckhout. Ben Casselman’s New York Times article last week on the startup slump is a nice nonacademic summing-up.)

a brief history of how this age-of-upheaval story got started

1] Creative destruction is a view of capitalism that had fallen out of fashion in the 1950s and 1960s. In “The New Industrial State,” published in 1967, John Kenneth Galbraith described the U.S. economy as dominated and steered by 200 or so gigantic, permanently profitable corporations.

2] Forbes 70th anniversary issue was a blaring announcement that a new era had dawned. There were pages and pages of lists showing shifts in the ranks of the country’s 100 largest companies from 1917 to 1945 to 1967 to 1987.

+ In 1986, Richard N. Foster, a partner at the consulting firm McKinsey, had come out with a book called “Innovation: The Attacker’s Advantage” that described how giant, successful companies were blindsided and sometimes destroyed by what he called “technological discontinuities.”
(moments when the dominant technology in a market abruptly shifted, and the expertise and scale that the companies had built up suddenly didn’t count for much == organizational obsolescence)

3] In 1990, management scholars Rebecca M. Henderson of MIT and Kim B. Clark of HBS published a now-classic article describing the “sometimes disastrous effects on industry incumbents of seemingly minor improvements in technological products.”

+ in 1995, a young HBS professor named Clayton M. Christensen gave the phenomenon a convincing story line and a name that would stick: “disruptive innovation.” (expanded and expounded upon them in his 1997 classic, “The Innovator’s Dilemma.” ← Christensen studied technological shifts in the computer-disk-drive industry and refine his observations -which were quite similar to what Foster had seen in other industries- as disruptive innovation)
→ backlash in 2014: There was little evidence that disruptive upstarts, or companies that disrupted themselves, consistently won out

(Background: Corporate raiders shook up big companies in the 1980s, forcing mergers and breakups. In the 1990s, several not-very-old technology companies blasted into the ranks of biggest and most valuable corporations.)

4] In a 2001 bestseller “Creative Destruction” Foster & Sarah Kaplan →  documented this upheaval with a striking chart showing the “Average Lifetime of S&P 500 Companies” declining from more than 75 years in the early 1930s to between 25 and 35 years in the 1960s and 1970s to about 15 years in 2000
← problems: it’s about time spent on the S&P 500, not corporate lifetime + it’s calculated simply by taking the inverse of the churn rate of the index (the percentage of companies entering and leaving each year) to arrive at an estimated average tenure +  the managers of what was then called the Standard Statistics Composite Index, and had a lot fewer than 500 companies on it, were as diligent and systematic about adding and removing companies in the 1930s as they have become since

The destruction tendency is wrong!!
(It is true, though, that the corporations that survived the terrible 1930s went on to rule the economy for decades. And the downward trend in S&P 500 tenure is apparent even if you start in 1960, as Foster did in a 2011 report (“Creative Destruction Whips Through Corporate America”) for Innosight, the consulting firm founded by Christensen) 

But, it’s apparent that not a lot had changed since 2000. When Innosight redid the chart for a report last year, it became apparent that average tenure had actually risen since then.)
スクリーンショット 2017-09-28 23.00.10
For more than 15 years now, companies have been staying on the S&P 500 for longer. 

+ Turnover on the Fortune 500 — a list of the largest U.S. companies by revenue published since 1955  — is also often cited as an indicator of corporate upheaval → no clear trend (Turnover rose from the early 1960s through 2000. Since then, it’s down)
スクリーンショット 2017-09-28 23.05.44
(One caveat is that before 1994, the Fortune 500 consisted only of industrial companies, and the addition of service companies after that makes before-and-after comparisons a little suspect.)

+ turnover among the 50 biggest corporations assembled by Victor Manuel Bennett & Claudine Madras Gartenberg (Business School) shows a similar pattern
スクリーンショット 2017-09-28 23.10.42

=>> The great wave of upheaval that began in the 1960s has given way to a period of corporate consolidation and relative stability
(→ a pause than an end to the upheaval? → the past 10 to 15 years as the calm before another technology-induced storm presaged by Silicon Valley’s surfeit of billion-dollar startups and an increase in mergers-and-acquisitions activity? )

The 2012 paper WHAT DOES FORTUNE 500 TURNOVER MEAN? → also question whether the kind of turnover we’re talking about here really is all that reflective of economic change and progress:
→ Departures from and additions to such lists are often driven by waves of mergers and acquisitions that are more about rearranging corporate assets than creation or destruction => “Turnover is less a broad economic trend, than a discrete temporal and sectoral phenomenon.”
→ historical research showing waves of corporate churn in the 1920s and the turn of the 20th century that seem to have been at least as disruptive as those of the 1980s and 1990s

=>> modern capitalism produces and probably requires a lot of creative destruction → But this isn’t a relentless, ever-accelerating process. It goes in waves → For about 15 years now we’ve been in a lull, and it’s not at all clear when or how it will end.

=> Something happened around 2000 that made it easier for top companies to stay on top


In the 2000s, a series of academic papers showed that corporate America had become a much less comfortable place for incumbents:
→ L.G. Thomas & Richard D’Aveni found big increases in profit volatility among manufacturing companies from 1950 to 2002.
→ Diego Comin & Thomas Philippon found a similar increase in the volatility of sales growth and other metrics. Many other studies delivered comparable results.
→ D’Aveni: the “Age of Temporary Advantage,” or of “Hypercompetition,”  or Clayton Christensen: the age of “disruption”

Victor Manuel Bennett and Claudine Madras Gartenberg took the volatility measures from the above papers and a few others, added some of their own, and updated them all
=> “We are able to replicate prior results suggesting that from the beginning of our data, through roughly 2000, sustainability of competitive advantage was decreasing steadily. Interestingly, however, we find a pronounced reversal of that pattern after 2000.”   (profit and sales volatility show more of a plateau after 2000 than a steep fall, but in any case something changed after 2000)

explanations by Justin Fox

1] Regulation.
→ One possibility is that the deregulation of several major industries from the 1970s through the 1990s led to more volatility, and with the end of that deregulatory wave after 2000 things settled down.
→ Another is that the piling on over the years of safety, environmental, land-use and other regulations by federal, state and local governments has given advantages to big incumbents.
→ Yet another is that by easing up on antitrust enforcement and other efforts to protect smaller businesses from bigger rivals, the government has made life easier for the big guys.

2] Capital markets.
→ The number of publicly traded companies in the U.S. is way down from its 1996 peak. Same goes for the number of initial public offerings. → Something seems to have happened — maybe because of regulatory changes, maybe not — to make public financial markets less congenial to newcomers and to corporations in general → making life easier for the biggest corporations

→ the pressures of the financial market and a preoccupation with corporate financial metrics have left most businesses “afraid to pursue what they see as risky innovations” and focused instead on cutting costs

3] Technology.
→ The Internet and other technological advances seem to be leading to the creation of winner-take-all markets in which that winner becomes really hard to unseat. → IT giants keep gaining ground and striking fear into rivals and potential rivals.


On the other side of the increasing volatility research, (Thanks to data that the Census Bureau began releasing a decade ago, economists can now track what they call “business dynamism” in ways they couldn’t before) researchers found that most metrics of dynamism and upheaval in American business have actually been declining for decades, with the downturn steepening after 2000.
→ Fewer new businesses are being launched + the average age of businesses is increasing + job creation and job destruction are on the wane +industries are being consolidated + fast-growth businesses are rarer

(Before 2000, the decline was most pronounced in the retail and service sectors, which has been proven largely been good for productivity (John Haltiwanger) → new national chains armed with new technologies attack local retailers as the incumbents →plenty of upheaval in the top ranks of the business world in the 1980s and ’90s)
=> All of that activity seems to have peaked, however, a year or two after the stock market did in 2000. Measures of big-business volatility began to drop.
=> High-tech start-up activity and what economists call the skewness of growth—how quickly the fastest-growing companies in a sector are outpacing the median company—declined below the levels of the mid-’90s and stayed there.
=> Most worrying of all, the burst of productivity growth that started in 1995 and is widely attributed to the use of new information technologies also seems to have ended in the early 2000s (→ technological change came in sudden bursts, with fast-growing new firms providing much of the impetus)

[+] It’s possible, of course, that the business-dynamism numbers fail to capture some of the economy’s actual dynamism
→ In the technology sector, many upstarts have in recent years opted to sell themselves to Google or Amazon and do their disrupting as part of an already large organization
→ because several of the metrics are based on job counts, what we’re seeing may be less a decline in dynamism than the rise of new, technology-intensive companies that simply don’t need many workers





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