By Victor Manuel Bennett

Leafing through the business press, you often see two kinds of stories.  The first is about how the business environment is changing so fast that old, established firms are at risk of being “disrupted” by upstarts.  The second is the opposite, about how incumbent firms have become so powerful that new startups have no chance.  Those both can’t be true, so I set out to look at what has actually happened over time in my recent SMJ article.

I looked at two measures that often get used when talking about entrenchment.  The first is whether having a good year last year makes you more likely to have a good year this year. This captures situations like the increasing importance of word-of-mouth where customers are more attracted to firms that are already successful. Another example would be increasing importance of economies-of-scale, where having grown your business last year lets you offer your products at lower prices this year, and thus be more competitive. Industry watchers who warn that robots and software tilt the balance in favor of incumbents might predict that this measure would have been trending upward constantly since the beginning of computerization in the 1970s and 1980s.  Similarly, marketers who have said that the flood of new brands from abroad and cheaper advertising making customers rely more on established brands might also have predicted a steady increase.  Surprisingly, the measure was actually at its highest in the mid 1980s.  It declined until around 2000 and then rebounded.  This story is not consistent with a lot of the predictions I read about.

The second measure is how likely incumbent firms in the top performance ranks, things like the Fortune 500, are to be there in the next year.  Interestingly, this measure does look like the predictions. The likelihood of staying in the top ranks of industry if you were there last year has steadily climbed since the 1970s.

How can it be that firms in the top ranks are becoming more likely to stay there, but profit measures are not more correlated than they used to be? Digging in more, I found that the bottom ranks of performance are where correlation is going down.  It looks like big firms are becoming more entrenched, but new entrants that don’t make it into the top ranks are part of a churn that has become more violent over the years.

We don’t yet know exactly why this has happened, but we’ve got some early possibilities.  Some more analysis makes it look like this pattern isn’t consistent with changes in antitrust enforcement (though that definitely happened), changes in when firms went public or delisted, the importance of intangible capital like intellectual property, or globalization. The most promising avenues seem to be changes in technology or better matching of talent to firms; it may be that the best managers are now better able to find the best jobs, making the top firms gain more exit velocity and leaving firms that don’t climb to the top unable to.

In short, there may be some truth to both groups of articles.  It may be harder for new entrants to climb to the highest ranks, but the biggest threat may be other entrants, not the increasingly dominant big players.

About the author

Victor Manuel Bennett is an associate professor at Duke’s Fuqua School of Business. His recent research focuses on automation—both robotics and software—and on implications for competition and jobs.