Churn Accelerating at Top Companies

A recent interesting read indicated that the lifespans of S&P 500 Index companies are shrinking. I wasn’t necessarily surprised by that fact, but taken aback by the amount of the decrease.

The report, conducted by the innovation consulting firm Innosight, shows that the pace of technology change, global competitors and pressure from start-ups are increasingly threatening some of the most iconic corporations. According to the report, the 61-year tenure for the average firm in 1958 narrowed to 25 years in 1980 — and to 18 years in 2011. At the current churn rate, 75% of the S&P 500 will be replaced by 2027.

Richard N. Foster, the firm’s lead director, argues that to combat this trend, companies must apply market principles to itself. In other words, the only way to fight fade is to embrace "creative destruction" before the market does it to companies. "Markets outperform companies — they always have, with only occasional exceptions," said Foster . "And you want to be one of the exceptions."

Foster recommends that companies use the market as their benchmark: If the S&P is turning over 5% of its companies in a given year, a corporation should seek to add 5% to its sales from new businesses while also undertaking the even more difficult task of shedding 5% of its current sales through divestiture. According to Foster, business leaders must "create, operate, and trade"— build new divisions and trade mature ones at the pace and scale of the market without losing control of their company.