Major Advances Seldom Come from Big Incumbent Firms

(p. 109) Most of today’s Fortune 500 were not there fifty years ago. All of the private sector’s net new jobs in the United States during the past twenty years were added by companies not on the Fortune 1000 twenty years ago: two thirds of the net new jobs came from companies with fewer than twenty employees twenty years ago. Ten years ago our automobile giants seemed invincible. Today we wonder whether more than one will survive.

In 1960, Theodore Levitt of Harvard wrote an article in the Harvard Business Review, “Marketing Myopia,” in which he pointed out that every industry was once a growth industry. Perversely, a vicious cycle sets in. After experiencing continued growth for a while, managers in the industry come to believe that continuing growth is assured. They persuade themselves that there is no competitive substitute for their product, and develop too much faith in (p. 110) the benefits of mass production and the inevitable steady cost reduction that results as output rises. Managements become preoccupied with products that lend themselves to carefully controlled improvement and the benefits of manufacturing cost reduction. All of these forces combine to produce an inevitable stagnation or decline.
In Dynamic Economics, the economist Burton Klein puts forward a carefully researched and very similar view: “Assuming that an industry has already reached the stage of slow history, the advances will seldom come from the major firms in the industry. In fact, of some fifty inventions [fifty key twentieth-century breakthrough innovations that he studied] that resulted in new S-shaped curves [major new growth patterns] in relatively static industries, I could find no case in which the advance in question came from a major firm in the industry.” George Gilder elaborates on Klein’s work “The very process by which a firm becomes most productive in an industry tends to render it less flexible and inventive.”
It appears that evolution is continuously at work in the marketplace; that adaptation is crucial; and that few big businesses, if any, pull it off. Many of our excellent companies most probably will not stay buoyant forever. We would merely argue that they’ve had a long run–a much longer and more successful run than most–and are coming much closer than the rest to maintaining adaptability and size at the same time.

Source:
Peters, Thomas J., and Robert H. Waterman. In Search of Excellence: Lessons from America’s Best-Run Companies. New York: HarperCollins, 2004.
(Note: italics and brackets in original.)