Live long and prosper?

Dr. Jonas Steeger

Even the big companies are facing increasing competition and are leaving the big S&P 500 Index earlier and earlier. What is the reason for this and what does it mean?

S&P 500 shorter tenure

In 1964, the average length of stay of the S&P 500 companies in the index was still 33 years. In 2017, the average dropped by a whopping 27% to 24 years. If the trend continues, the average length of stay will probably fall to a meager 12 years by 2027 (see Innosight Executive Briefing, February 2018). This would mean that on average every 12 years a completely new set of companies would form the index.

Is Schumpeter hitting?

The length of stay of companies in the S&P 500 fluctuates cyclically. These cycles reflect the state of the Western economy. But the driver behind the cycles seems to be not only global crises but above all technological progress. Highly disruptive start-ups such as Uber and AirBnB are taking advantage of this progress and are increasingly giving the old-established people a headache.

The drivers of change

  1. Digital transformation (especially for retailers)
  2. Platform business models
  3. Artificial Intelligence
  4. Clean- and Biotech
  5. 3D printing
  6. Virtual reality

Tenure as an indicator for transformation needs

Looking at the S&P 500 tenure as an overall picture, it serves as a barometer for the change in the market. A shorter tenure indicates exogenous shocks (such as crises) and changing basic conditions (such as technological progress).

The distance between exogenous shocks is relatively constant. Since the length of stay is nevertheless becoming increasingly shorter, this is a clear indication of ever shorter innovation cycles on the one hand and ever faster adapting and growing companies on the other.

It is therefore hardly surprising that 80% of the 300 executives surveyed by Innosight in 2017 see a strong urge for transformation. But the interviewees see the origin of the pressure to change particularly in their own industry. In fact, however, the aspirants have often appeared on the scene in a completely new way (e.g. Paypal, Amazon, Facebook, Alphabet and Netflix).

Does this also apply to German companies?

Of course, the basic system also applies to German companies. It shows that it is not only worthwhile to know your competitors in your own market, but also to keep an eye on related markets at all times.

However, the trend points even more clearly to the increasing role of consumers. This is because the increasing transparency of prices and product qualities is causing margins to fall in most markets. The pressure on margins usually leaves highly digitalized companies at an advantage.

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