Creative Destruction or Just Destruction? An Analysis of Fortune 100 Companies in 1955 and 2020
By: Jeffrey Lee Funk
Tags: Disruption, Innovation, Startup, Venture Capital, Technology

The small number of companies on the Fortune 500 or 100 for both 1955 and 2020 is not due to creative destruction, and it does not symbolize the strength of the U.S. economy, as some claim. For instance, the American Enterprise Institute’s (AEI) analysis found that only 52 companies on the Fortune 500 in 1955 were still on the list in 2020, a conclusion I do not dispute. It claims that “The fact that nearly nine of every 10 Fortune 500 companies in 1955 are gone, merged, reorganized, or contracted demonstrates that there’s been a lot of market disruption, churning, and Schumpeterian creative destruction over the last six decades.” It continues: “The constant turnover in the Fortune 500 is a positive sign of the dynamism and innovation that characterizes a vibrant consumer-oriented market economy, and that dynamic turnover is speeding up in today’s hyper-competitive global economy[1].”

But is creative destruction the reason for the small number of companies remaining on the Fortune 500, creative destruction that is led by young vibrant American firms introducing highly productive new technologies? I admit that these are my words and not the words of the AEI. Nevertheless, behind the AEI’s claim that the small number of remaining companies is due to “market disruption, churning, and Schumpeterian creative destruction” is the notion that American companies are doing the disrupting and thus Americans are benefiting from this creative destruction through higher productivity, incomes and standard of living.

We know that the last part of the last sentence is not true. Productivity data demonstrates a clear and persistent growth slowdown over the last 80 years, as many readers, particularly those who are followers of Robert Gordon will know[2]. This trend has continued, and a judging panel noted “that the 2010s were the worst decade for productivity growth since the early 19th century[3], despite the positive impact of globalization on productivity. The continued slowdown suggests there was also a slowdown in technological and innovative output in recent decades, an issue we can also address using the change in companies in the Fortune 100 between 1955 and 2020.

I categorized each company in the Fortune 100 into sectors, and in some cases industries, in order to see how the list of companies have changed between 1955 and 2020[4]. The reasons for the rise and fall of these industries are then discussed, drawing from many historical sources. From this analysis, this article concludes that the main reason for the small number of remaining companies is due to the evolution of American economy away from manufacturing to services, an evolution that is more due to foreign competition and financial engineering than to creative destruction by small American companies.

As shown in Table 1, the number of manufacturing and oil companies fell from 74 and 14 to 20 and 9 respectively while the number of financial/insurance, information and communication technology, health care, and retail companies rose from 3 in total to 22, 17, 12, and 11 respectively (total of 62). The ICT companies represent the biggest disruption by new American startups, innovation, venture capital and IPOs[5] while the manufacturing companies declined mostly because of foreign competition and they were replaced by old banks and insurance companies, many of which were founded in the 19th century. In fact, the average age of companies increased from 63 in 1955 to 100 years in 2020, not a sign of newly founded startups disrupting old line companies. M&A were also a big driver of change with the rise and fall of conglomerates, hostile takeovers, and other financial engineering, which reduced the number of oil and manufacturing companies.

Delving into these trends in more detail, the number of oil, tire, auto, steel, food, chemical companies also fell due to foreign competition, consolidation, and some technological change. The number of oil companies dropped from 16 to 6 from consolidation, and not from technological change, despite the rise of fracking. Exxon and Mobil merged as did Chevron and Texaco with the latter two firms acquiring Union Oil, Unocol, and Pure Oil along the way. Sinclair Oil and ARCO were acquired by British Petroleum and BP America was no longer considered an entity for the Fortune 500 in 2020. There were no fracking companies in the Fortune 100 in 2020

The number of auto and tire companies fell from 9 to 2 from both consolidation and foreign competition, but again not from technological change. Electric vehicles had less than 2% of the market in 2019 and Tesla is still far from being a Fortune 500 much less a Fortune 100 company. Instead, component and tire suppliers were either acquired or driven out of business by Japanese and other competition. Firestone was acquired by Bridgestone, Uniroyal and Goodrich by Michelin, and Goodyear still exists at a much smaller scale. Although there was some innovation by Japanese companies in terms of manufacturing techniques, there were no large product innovations and overall, it was Japanese companies doing the innovation and not American ones.

Steel was also decimated by foreign competition, initially by Japan and later by China, causing the number of companies in the Fortune 100 fell from six to zero. Bethlehem and National Steel went bankrupt and the others (Armco, Youngstown sheet & Tube) still exist as much smaller companies; Republic Steel and Jones & Laughlin merged to form LTV. Unlike the auto, rubber, and oil industries, however, the basic oxygen furnace and continuous casting were examples of creative destruction, which resulted in big productivity advantages for the Japanese and European producers.

Other metals such as aluminum and lead were also impacted by foreign competition, particularly from China, and also creative destruction by plastics. For instance, plastic bottles have replaced a significant fraction of aluminum cans and glass bottles (and also reduced demand for steel in many assembled products). The results is that the number of other metal producers dropped from four to zero, including Alcoa and Reynolds Aluminum leaving the list. As an aside, several glass bottle and canning companies also fell of the list between 1955 and 2020. Despite the growth in plastic usage, however, the number of chemical companies fell from eight to one. Dow and Dupont merged and acquired Union Carbide along the way. Monsanto was acquired by Bayer and thus is no longer an American company.

The number of food companies also dramatically decreased, falling from 20 to four, probably because more meals are eaten outside or are delivered to homes. Mergers impacted on General Foods, Kraft, Standard Brands, and Pillsbury, yet one resulting entity, Kraft Heinz, is not in the Fortune 100. The two food companies in the Fortune 100, Tyson Food and Archer Daniel Midland, might be considered disruptors because of Tyson’s innovations in chicken processing using assembly lines and ADM’s emphasis on intermediate food products.

Other new companies include retail, healthcare, finance/insurance, drug, and information & communication technology. The last two are certainly the case of new technologies disrupting old ones, and retail, might also be considered an example of disruption. The number of drug companies rose from zero to four and the number of ICT companies rose from 6 to 17. Their stories are told elsewhere so there is no need to tell them here. Nevertheless, the increases from 6 to 17 does not tell the whole story because the 6 on the 1955 list were analog telephone (AT&T), radio/TV (RCA, CBS), and early computer (IBM, Sperry) companies, nothing like the semiconductor, personal computer, software and Internet companies that were to follow.

Retail companies might also be considered examples of technology disruption because they used information technology to increase product variety and manage increasingly complicated supply chains. Companies such as Walmart, Costco, Walgreens, Kroger, Home Depot, Target, Lowe’s Albertsons, and Best Buy sell us a remarkable number of different products at low prices, courtesy of computers, software and other devices. Retailers such as Albertsons might also be considered food disruptors because they have brought a greater variety of food to consumers.

The healthcare, finance and insurance companies have been the biggest replacements for the manufacturing companies that dominated the 1955 list. They represented more than half the companies in the 2020 list, but most are old companies. Most of the finance and insurance companies can trace their roots back more than 100 years with some going back to before America’s Civil War. These companies have slowly grown over time benefiting from the deregulation that allowed them to cross state lines and thus become huge national banks, investment companies, and insurance providers. Just as healthcare now represents about 18% of GNP[6], and finance and insurance about 8%[7], companies from these industries represent 34% of the Fortune 100.

In summary, the American Enterprise Institute and many others have misinterpreted the reasons for the small number of 1955 companies that still remain on the 2020 list. The evolution of the Fortune 100 is not a symbol of creative destruction, it merely reflects the evolution of the American economy, from manufacturing to services, driven mostly by foreign competition, hostile takeovers, and the rise and fall of conglomerates. Although some of this was driven by innovation, particularly in the ICT and drug sectors, innovation played a small role in the decline in the number of steel, auto, tire, chemical, and oil companies on the list.

Does this tell us something about the future? It probably tells us that we can expect continued changes in the companies, but little changes in products and processes and thus few improvements in productivity. Analyses of startups lead to the same conclusions[8]. If we want a better future, we need to rethink how R&D and innovation are done.

[1] https://fee.org/articles/comparing-1955s-fortune-500-to-2019s-fortune-500/

[2] The Rise and Fall of American Growth, Robert Gordon, 2016, Princeton University Press

[3] https://www.ft.com/content/8d7ef9b2-24b4-11ea-9a4f-963f0ec7e134

[4] Here are the companies for 1955 (https://archive.fortune.com/magazines/fortune/fortune500_archive/full/1955/) and those for 2020 (https://fortune.com/fortune500/2020/search/). I added Ford to the 1955 list because for some reason Fortune failed to put it on the list.

[5] https://medium.com/@jeffreyleefunk/the-most-valuable-startups-founded-since-1975-none-have-been-founded-since-2004-8bc142b67051

[6] https://www.cms.gov/Research-Statistics-Data-and-Systems/Statistics-Trends-and-Reports/NationalHealthExpendData/NationalHealthAccountsHistorical#:~:text=U.S.%20health%20care%20spending%20grew,spending%20accounted%20for%2017.7%20percent.

[7] https://fred.stlouisfed.org/series/VAPGDPFI

[8] https://medium.com/@jeffreyleefunk/what-will-happen-to-todays-privately-held-unicorns-valued-at-1-4-trillion-13f507797487

https://medium.com/@jeffreyleefunk/why-are-todays-startup-unicorns-doing-worse-than-those-of-the-past-1c8ece718ab0 https://medium.com/@jeffreyleefunk/are-there-any-industries-in-which-ex-unicorns-are-profitable-747eca652170

https://medium.com/@jeffreyleefunk/how-successful-are-todays-startup-unicorns-893043f32d24