It’s Good to Be a Big Corporation Again
In the 2000s, a series of academic papers showed that corporate America had become a much less comfortable place for incumbents. Lots of people in corporate America already knew this, but it was helpful to see peer-reviewed evidence: L.G. Thomas and Richard D’Aveni found big increases in profit volatility among manufacturing companies from 1950 to 2002. Diego Comin and Thomas Philippon found a similar increase in the volatility of sales growth and other metrics. Many other studies delivered comparable results.
It had become the “Age of Temporary Advantage,” or of “Hypercompetition,” to filch the titles of an article and a book by D’Aveni, a professor at Dartmouth College’s Tuck School of Business. Or, more familiarly, the age of “disruption,” the term popularized by Harvard Business School’s Clayton Christensen. And it still is, if you read the business press or attend a business conference or come within 100 miles of Silicon Valley.
This summer, though, Victor Manuel Bennett and Claudine Madras Gartenberg, professors at Duke University’s Fuqua School of Business and New York University’s Stern School of Business respectively, did something interesting. They took the volatility measures from the above papers and a few others, added some of their own, and updated them all. Here’s what they found:
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.
Here, for example, is what happened to turnover among the top 50 corporations listed on U.S. stock exchanges as ranked by revenue:
Turnover in the ranks of the biggest corporations rose and rose until 2000, but has fallen back to 1970s levels since. The charts on profit and sales volatility in the paper 1 show more of a plateau after 2000 than a steep fall, but in any case something changed after 2000.
Why did this happen? Bennett and Gartenberg go through a list of possible reasons in the paper, but don’t really pick a favorite. I’ve written about this phenomenon a couple of times before and have found that the explanations fall in three main categories:
- 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.
- 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. And that could be making life easier for the biggest corporations.
- 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. Think Amazon.com, Apple, Facebook, Google; maybe Microsoft and Netflix too -- these companies aren’t old, but they’re not exactly new anymore either, and they keep gaining ground and striking fear into rivals and potential rivals.
I’m guessing it’s elements of all three at work (with the third weighing the heaviest), plus maybe some other factors that no one’s really paying attention to yet. For the moment, though, there’s still a lot of uncertainty, and the most important task seems to be getting the word out that the age of temporary advantage is over. Temporarily, at least.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
I didn't include them here in part because it's pretty hard to explain to a lay readership (not to mention myself) what exactly it is that's being measured.
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