Disruption in Corporate America

Did you know that in 2010 and 2011 three iconic American companies–Eastman Kodak, Radio Shack, and The New York Times–were removed from the S&P 500 Index.  Eastman Kodak was replaced by a cloud computing firm and The New York Times was replaced by Netflix.

In 2011, 23 companies were removed from the S&P 500 due to declines in market value or because of acquisitions.  The image below contains a few of the companies that have been added and removed from the S&P 500 over the ten year period ending 2012 (Courtesy of Innosight).

Companies that have entered and exited the S&P 500 during the 10 years ending 2012.

A sample of companies that have entered and exited the S&P 500 during the 10 years ending 2012.

Interestingly, a 2012 Innosight study of almost a century’s worth of market data found corporations in the S&P 500 in 1958 lasted in the index for 61 years, on average. By 1980, the average tenure had shrunk to about 25 years. In 2012, tenure stood at just 18 years based on seven year rolling averages. In fact, on average a company in the S&P 500 is now being replaced about once every two weeks.

What gives? In his book Creative Destruction, Richard Foster applies economist Joseph Schumpeter’s theory that “economic progress, in capitalist society, means turmoil to understand the situation. Foster reasons that the challenge faced by all companies is to grow at or above the pace of their industry, without losing control of their operations. However, the innovation necessary to create significant new businesses can often create conflicts in the operational effectiveness of the current business. And that means change — even for big companies.  In other words, Foster says “To survive and thrive, 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. Few companies have been able to do so over the longer term.”

While the study and Foster’s book go a long way in helping entrepreneurs understand how to grow their business, there’s an investing lesson, too. The S&P 500 is not a static index. It changes to reflect the market. With the S&P 500 you own a proxy of US large company stocks no matter how fast-moving the index becomes. And that underscores wisdom of investing in a global portfolio instead of trying to research and trade in and out of individual stocks.

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