The Great Disruption Deception

‘Disruption’ is the most weaponized word in business.

It is a threat:

“Welcome to the New Kodak Moment- the moment when an exponential force puts a linear company out of business.”

- Peter Diamandis

It is an iron-fisted endorsement:

“This is the disruptive product we’ve been looking for.”?

--Dan Doctoroff, former CEO of Bloomberg, said this to quash resistance to a new ESG product, while I worked there.

It is an exemption:

“Investments in disruptive innovation… can’t be assessed with the same tools for analyzing normal financial performance.”

• Clay Christensen??

I never bought it. It always struck me as an empty scare tactic. “If you don’t invest in this, ‘Disruption’ will kill you."?

There was a fundamental question that no one had an answer to: How frequently does disruption happen? More specifically, how often does a startup displace the leading companies in an industry??

This is the question I set out to answer.

Here’s what we found:?

Only 23 new companies have broken into the Fortune 500 since 1997.?

Only 4%, or 23 of the 568 companies included in the Fortune 500 since 1997 were under 15 years old when they entered.?

Think about that for a second: in 2021, 9,030 startups raised $201 billion in early stage capital, according to Crunchbase. These startups have a .0025% chance of reaching the Fortune 500 if past conditions hold. In tech sectors 9 of the 132 companies, or 7% were new entrants. In non-tech industries 13 of the 468, or 2.78% were new entrants.?

48 out of 58 industries have never seen a new entrant.

Energy, oil and gas, investment banking, insurance and healthcare are among the 48 industries which have never seen a new entrant break into the Fortune 500. They have seen mergers, acquisitions, and spinoffs, but no startup has ever displaced an incumbent from the top ten.

Only 10 of 23 new entrants were ‘disruptive’. By disruptive we mean that their ascent caused older incumbents to decline. Most new entrants were like Jet Blue (entered in 2006) or Capital One (entered in 1999). Their ascent created competitive pressure, but they didn’t cause the incumbents to collapse.?

Diversification is disruptive. The companies that did disrupt are difficult to categorize, and that is the point. The rise of 谷歌 and Meta clearly damaged the media and entertainment industry, but Fortune categorizes them as ‘Internet and Direct Marketing Retail.’ This is the same industry as Amazon which won market share from retail. This pattern is also evident with CapitalOne which began in diversified financials before acquiring its way into commercial banking. If #tesla were to use its batteries to power homes, or 亚马逊 were to diversify into investment banking, they would be following a credible, clear pattern of disruptive diversification.?

The only company to break into the Hotel and Leisure industry was…….? Not AirBnB, which has not yet made it into the Fortune 500. Trump Hotels & Casino Resorts entered the Fortune 500 in 1998, and was out faster than a one-term President in 1999.?

There’s lots of work still to be done. This analysis required some judgment, and lots of data. There were many toss-ups. For example, Paypal was older than 15 by the time it broke into the Fortune 500, so we didn’t include it. We didn’t count companies that were formed by mergers, acquisitions, and spinoffs as new entrants, which meant that we didn’t include AOL-Time Warner. The results would probably be different if we analyzed the S&P 500, the Fortune 1000, or the Global 500. Just being fully transparent.?

How this should translate into action for business leaders:

1. The cost of not innovating is not what you thought. It’s not a startup like Netflix destroying Blockbuster. These are extreme outliers (and irresistable David v. Goliath stories) that have a 4% chance of occurring. In most industries it’s a huge company becoming better at what they do and entering adjacent markets through innovation that determines who wins and loses.
2. Disruption is Diversification - The most disruptive companies in this analysis never stayed in the industry where they started. Capital One, Amazon, Facebook, and Google disrupt because they enter adjacent markets where incumbents became complacent about their customers. Big companies pivoting is a lot more dangerous than a small company growing.
3. Startups should be partners not displacers. - We were shocked that in 25 years only 23 startups ever grew big enough to challenge the incumbents of ten Fortune 500 industries. The strategic lesson for founders is that they are interesting vendors, investments, and acquisition targets. But they almost never grow big or fast enough to pose a real disruptive threat to an industry.?

Huge thank you to John Johansen , Elizabeth Michelle Gafford , and the amazing students at 美国北卡罗莱纳州立大学 who helped pull this together.

John and Elizabeth are members of the executive network Punks & Pinstripes, a group of rebel leaders who believe in data over dogma.?