By 2027, according to research by Innosight, the average lifespan of an S&P 500 company is expected to be just 12 years, exactly half of what it was only a few years ago (24 years in 2016). This shrinking lifespan is caused by a number of factors—record private equity activity, a robust M&A market, and the growth of “unicorn” startups with billion-dollar valuations, to name a few. Rapidly evolving technology and economic shocks, led by geopolitical forces, are also at play, which are largely outside of the control of enterprise leaders.
But frequently, it’s not external factors, but a failure to recognize or respond to them internally, that contributes to the fall of the modern enterprise. The business landscape is littered with cautionary tales of once-untouchable enterprises that failed suddenly, and swiftly: Blockbuster, Kodak, and Yahoo to name a few. What went wrong? A lack of innovation, certainly. But perhaps even more importantly was an unwillingness to evolve internal processes enough to impact time-to-market and customer or market demands.
Blockbuster never saw Netflix coming. By the time it began experimenting with streaming services, it was too late. In 2012, when Kodak went bankrupt, it was still focused on photo printing. Just a few months before, Facebook had bought Instagram for $1 billion—a clear sign that the direction of the market for sharing photos was moving online.
At the current rate, nearly half of the S&P 500 companies will be replaced over the next decade. No one is safe from the forces of disruption. Retailers have already been heavily hit, a trend which is expected to continue, but there are also strong indicators of disruption in financial services, healthcare, energy, travel, and real estate.
Given the imperative for change, why are so many enterprises reluctant to do so? The reasons, which we’ll explain in this post, vary but each of them speaks to an overall need for a change in how enterprises operate at their core. Dual transformation—an approach for making the core business more resilient while at the same time pursuing a strategy to drive tomorrow’s growth—is a job for which Lean and Agile are purpose-built. You can read more about that in our eBook, 5 Lean-Agile Culture Shifts to Achieve and Sustain Organizational Agility. In this post, we’ll discuss trends driving the shrinking lifespan of the S&P 500, to help you get ahead.
The Confidence Bubble
While many of the S&P’s newest additions are better, smarter versions of the companies they’ve replaced—like Facebook replacing Yahoo! —others are creating categories of their own. These companies are creating entirely new products and business models, and/or serving entirely new customers: Airbnb is a great example of this, with nearly 100 million room nights booked each year. It’s difficult to say exactly what industry Airbnb is disrupting, but it’s obvious that the new type of customer Airbnb has found (homeowners looking to rent their spaces short-term) was already there, waiting for a company to meet its needs.
While 80% of enterprise executives agree that their company needs to transform their core offerings or business model in response to rapidly changing markets, their reasons why are telling: 55% of executives surveyed said that their greatest competition in the next 5 years would come from within their industry. This means that over half of executives seem to underestimate the threat of true disruption from outside/new players.
The firm’s research also points to the fact that executives are downplaying the threat that digital technologies and artificial intelligence will have on their businesses.
Innosight refers to this blind spot as a “confidence bubble”, overconfidence in their company’s preparedness for change, coupled with a lack of investment in those activities that would prepare it for disruption.
Reluctance from the Top
When asked what factors present the greatest threat to their transformations, two factors are seen as the greatest threats:
- Finding and retaining the right talent
- Day-to-day decisions across functions undermine stated strategy
76% of executives say that finding and retaining the right talent is a moderate to major obstacle, while 69% point to “shadow strategy” —where day-to-day decisions undermine the stated strategy. Ultimately, these two factors are closely linked: In order to execute long-term strategic objectives, executives need the ability to align the efforts of individuals across the organization around those strategies. They need to be able to rely on the right people to stay focused on both the present and the future.
And change, of course, is not easy. Often, the type of leadership required to embrace dual transformation (or Lean-Agile transformation, as it were), is quite different than that which has been taught in enterprises for the past 100 years.
Notably, over 50% of executives cited a “lack of governance system adapted to core, adjacencies, and new growth” as a major or moderate obstacle. It seems as though reluctance from the top to adapt to transformation, might actually be a symptom of a more systemic need for transformation from the inside out.
Not Enough Focus on Shifting Consumer Behaviors
The Kodak example above is a perfect case study in what happens when companies fail to recognize and adapt to shifts in consumer behaviors. There’s great danger in assuming that the behaviors of people today won’t change—and quickly at that. “People will always want to (insert your core business here),” is an assumption that no company can afford to make.
Luckily, most companies seem to recognize changing customer needs as a threat to their business (68% of executives agreed that these changes were ‘very’ or ‘somewhat’ threatening). While it’d be impossible to adopt a true “ask and you shall receive” approach to customer requests, it’s imperative that enterprises systemically keep a figurative finger on the pulse of what their customers want, both today and in the future.
Lean-Agile transformation can help organizations stay on the pulse of what’s next—while maintaining a more accurate picture of what customers need right now.
Failure to Embrace Dual Transformation
The office supply store Staples provides an even more recent example of what happens when companies fail to prepare for the future by embracing dual transformation. Since the late 1990s, Staples has been devoting resources to developing online sales and delivery, and rightfully so: In 2016, online sales represented over 60% of its $18.2 billion in sales. However, while developing its e-commerce capabilities, the office supply giant failed to evolve its core business model. The company has shuttered brick-and-mortar locations at an increasing rate since 2011, and with its share price in decline, agreed to a private equity deal in 2017 and thus delisted itself as a public company.
As Staples and countless other retailers have shown, simply trying to replace store revenue with online sales is not enough to circumvent disruption. A better example to look towards is Amazon, which has developed from an online book store, to a one-stop shop for nearly anything, while also developing its Amazon Web Services into a $10 billion behemoth.
In order to survive, companies need to discover new growth opportunities outside the core business, while promoting stability and sustainability through a focus on customer needs.
To learn how to embrace transformation in your organization and how to overcome the most common challenges, read the “5 Lean-Agile Culture Shifts to Achieve and Sustain Organizational Agility” eBook.