Innovate or die
In business, as in life, change is inevitable. So far, in this chapter, we have discussed the environmental implications, but being a sustainable company also requires addressing critical social aspects such as social trends, labor, and politics. In the past, a company’s primary objective was to serve its shareholders, but that is rapidly changing to fulfill the needs of the employees, customers, partners and ecosystems, communities in which they operate, and social and climate issues.
These CEOs are inevitably compelled to implement robust ESG programs. It is no longer optional. Expectations are running high from employees, customers, the capital market, and shareholders.
One of the best ways to examine this concept is by tracking the companies included in the S&P 500 Index. By taking a snapshot at any point in history, you can explore what industries and companies are rising and falling with the times. Primarily shaped by the digital revolution, the lifespan of large, successful companies on the S&P 500 has never been shorter. In 1969, a third of the S&P 500 index was composed of industrial companies. A half-century later, 68 firms are industrials. At the same time, IT companies have emerged, rapidly increasing from 16 to 68, and are now tied for the top sector spot (Finch 2019). According to the 2021 Corporate Longevity Forecast (Viguerie, Calder, and Hindo 2021) from growth strategy consulting firm Innosight, S&P 500 lifespans continue to decline, and fast-shaping “hybrid industries” create new risks and opportunities.
The report highlights some significant insights:
- The average tenure on S&P 500 is rapidly decreasing. In 1965, the longevity was 33 years. In 1990, the lifespan had shrunk to 20 years. By 2026, it has been forecasted to shrink to just 14 years.
- At its current pace, S&P 500 will replace 50% of the companies listed in the next 10 years.
- Due to market evolution, since 2000, 52% of companies on the Fortune 500 have been acquired, ceased to exist, or gone bankrupt.
As highlighted in Figure 1.14, there has been a dramatic shift in the top 12 spots on the S&P 500 regarding market capitalization. Where General Electric held the top position in 2000, 15 years later, it had slipped to the middle of the pack, and by 2022, it had fallen entirely off the top 12 list. Currently, the market cap sits at $105.75 B, which is 4.5 times less than it was 22 years ago:
Figure 1.14 – Market cap development on S&P 500
Apple, Microsoft, Alphabet/Google, Amazon, and Meta/Facebook stem from the technology sector and now inhibit the top 5 spots. Except for Microsoft, the other four companies were not even on the list in 2000. That is an earth-shattering sector rotation that has taken place in the past 22 years, primarily driven by the Fourth Industrial Revolution (4IR). Outside of the tech sector, companies such as Unilever, IKEA, Marks & Spencer, Reckitt, and Danone have taken a pole position in taking sustainable actions. In Chapter 9, Sustainability by IT, we will look at a case study from Decathlon where they have launched bikes as a subscription for kids with the ambition to transition into a circular economy model.
Besides General Electric, another great example of managing risk poorly is ExxonMobil, the world’s largest company in the United States. In 2000, the company was sitting comfortably in the number 2 spot with a market capitalization of $302 billion. As global oil prices peaked in 2007, the company’s market value topped $500 billion, making it the most valuable – and the most profitable – company in the world. However, when oil prices tanked and demand flatlined, ExxonMobil’s fortunes were about to run out. Whereas the S&P 500 index has increased 277% in the past decade, Exxon Mobil’s total return has dropped 20%, leaving it at $307 billion of the market capitalization, which is about the same as in 2000.
What is remarkable about ExxonMobil’s demise is that their research confirmed the role of fossil fuels in global warming decades ago: “There is a consensus throughout the science community that humankind is heavily impacting global climate from burning fossil fuels resulting in the release of carbon dioxide into the atmosphere. Potential catastrophic events have to be considered. Regions may turn into deserts, and heavier rainfall may hit other regions. Time is running out; we have a time window of 5 to 10 years to consider alternative energy strategies” (Banerjee, Song and Hasemyer 2015).
Although ExxonMobil’s top executives were warned already, in the 1970s, of possible catastrophe from the greenhouse effect by their chief scientist, James F. Black, the warning signs were blatantly ignored. Instead, they led efforts to block solutions. Due to a lack of company performance, activists’ shareholders are now calling for drastic measures to turn the oil and gas giant around with more sustainable and circular economy practices.
As we saw earlier, the digital revolution is a long-term trend that has reshaped the S&P 500. Many leading companies did not adapt to changing competitive landscapes throughout history or adopt new business models. Some of the companies that did not innovate, resulting in business failure, are Blockbuster, Polaroid, Toys R US, Pan Am, Borders, Pets[dot]com, Tower Records, Compaq, General Motors, and Kodak. Although the full impact of the COVID-19 global pandemic is not yet known, we will see it play out in front of our eyes in the next few years. Creative destruction is here to stay, and we will only see it accelerate in the coming years.