1 of 3 – Why Unicorns Eat Dinosaurs for Breakfast
The why and how every established company can engage employees, accelerate innovation and transform culture, to fuel innovation and avoid becoming someone else’s breakfast.
“75% of the S&P 500 companies will be replaced by 2027” (Innosight). When I first heard this statistic, it captured me for days. If I were not already an entrepreneur, I would most certainly be applying my skills at an S&P 500 or Fortune 500 company, as many of my friends do. And if that were the case, I’d only have a 1 in 4 chance of keeping my job over the next 13 years, regardless of how well I performed or how long I worked there, according to current estimates. I find this a very scary thought.
Let’s say you had a company in 1958 and your company had been listed on the S&P 500. Your company did a great job in meeting a market need and it grew to a considerable size, probably employing thousands of people. In 1958 you could have expected an average life span of 61 years on the index. If you have a company today on the S&P 500, you can only expect a life span of 18 years, down from 25 years in 1980.
A company is normally removed from the list or replaced due to a decline in value or due to being acquired. In 2011 a total of 23 companies were removed from the list and in the last 3 years alone notable companies such as Dell, Motorola, Sears, Sprint Nextel, Advanced Micro Devices, J.C.Penney, Kodak, Office Depot and the New York Times have also lost their spots. The same trend is happening with the Fortune 500 – 50 years ago the life expectancy of a firm in the Fortune 500 was 75 years and today it is less than 15 years (Forbes).
“50 years ago the life expectancy of a firm in the Fortune 500 was 75 years and today it is less than 15 years (Forbes).”
It is clear that established companies are not living for as long as they once did and the rate at which these companies are dying off or becoming insignificant is increasing. This is also known as The Innovator’s Dilemma as described by Christensen Clayton. Just look at the last few years. Blackberry, Nokia, Kodak, Blockbuster, Radio Shack – they were all huge power houses with big brand names and they have suddenly all become insignificant in today’s market. It’s a dinosaur’s graveyard out there! So what’s causing this cancer?
The Cash Cow Cancer Syndrome
In Walter Isaacson’s biography about Steve Jobs, he describes a particularly enlightening moment when Jobs has a theory about “why decline happens” at great companies. In the beginning of a company’s life, Product Engineers and Designers make great products that make the company successful in a certain field. (Let’s call this success a Cash Cow created from a disruptive innovation). After this initial period of success though, Salesmen become valued more and put in charge as they can move the needle on revenues. This causes Product Engineers and Designers to feel demoted and they begin to switch off: their efforts are no longer at the epicenter of the company’s daily life. It’s become easier to milk the cash cow than to try and add new value. The company stops playing offense, preferring defense and starts to die. Jobs quotes Xerox and IBM as examples.
Let’s look at this from another angle and see what determines the overall life span of corporations and not just the cause of its demise as described by Jobs. According to Foster, who wrote Creative Destruction in 2001, the life span of a corporation is determined by balancing 3 management imperatives:
- Running operations effectively
- Creating new business which meet customer needs
- Shedding business that once might have been core but now no longer meet company standards for growth and return
These points make a lot of sense as well and here we can draw a parallel with what Jobs hinted at. Product Engineers and Designers are great at creating new business by engineering new products or services which meet customer needs, but once the new product turns into the cash cow, ‘running the operations effectively’ becomes the new focus i.e. milking the cash cow. The cash cow gets all the attention and the people who were good at creating new ideas, begin to switch off. We cannot ignore the importance of attending to the cash cow – seeking growth in existing markets, R&D expenditure to improve the offering etc. But we must notice these are improvements of an incremental type and if all the creative people are attending to the cash cow and none of them are figuring out how to create an entirely new cash cow, then it can leave the organisation exposed. One day, markets will change drastically (probably technology driven) and the cash cow won’t be able to produce milk anymore!
Furthermore, companies are slow to shed businesses that are not growing any more. You don’t jump from a sinking ship until the lifeboat is in the water and if there is no lifeboat…. well…. you just hang on to the sinking ship! Therefore the life span of a corporation fending off its demise essentially hangs in the balance of two types of innovation:
1) The act of running your company for today and using incremental innovations to improve your offering, whilst…
2) Ensuring your company has disruptive innovations in the pipeline to generate new cash cows.
Not innovating to create new business opportunities is like letting a cancer creep up on you. Nothing seems wrong until it’s too late. But hasn’t this always been the case, today as well as in the past? So why does the Cash Cow Cancer Syndrome seem stronger today than before? Why are established companies at so much more risk? Read part 2 to find out how entrepreneurship is giving rise to Unicorns – Billion Dollar startups, faster than ever before.