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Disruption has reshaped the corporate sector

Corporations evolve a lot differently today than the world’s most valuable companies did 50 years ago. The changes are a result of widespread disruption.

Apple became the first company to reach a market capitalization of US$1 trillion. The other three most valuable companies today are Amazon, Alphabet (Google) and Microsoft. Their principal assets are patents, knowledge, ideas and strategy.

The most valuable companies in 1970 were General Motors, Exxon Mobil and Ford Motor. Their principal assets were factories, oilfields, infrastructure and inventories.

What’s changed? Why is a major corporation evolving today more likely to be a Facebook, Netflix, Google, Twitter, Alibaba, LinkedIn, Groupon, WebMD, Spotify, Shopify or Yelp, than a Walmart or Alcan?

First, there has been a dramatic increase in the pace of value creation and destruction in the corporate sector. A new company can achieve dramatic growth much quicker than a 20th century corporation, which operated with factories, products and supply chains, and took years or even decades to build.

A 21st century company can sell idea-based products and reach global markets on the Internet almost instantaneously. For example, when Google’s co-founders created a better search formula in their garage in California, they quickly displaced the popular search engines of Yahoo, Altavista and Excite.

A 21st century company, however, is also highly vulnerable to loss of market leadership as new players come along with better ideas and products. BlackBerry and Nokia, the world’s most desirable phone equipment suppliers as recently as 2010, practically dropped out of the telecom market as Apple and Samsung came up with advanced products.

As modern corporations compete with ideas and strategy instead of physical capital, the pace of creative destruction in the corporate sector accelerates. No company is immune to disruption, whether it’s RadioShack, Macy’s, General Electric or Walmart. As a result, companies have no choice but to innovate every day if they hope to see the light the next day.

The roles of employees and their required skills are also changing. Fifty years ago, a high school dropout could start as an apprentice in General Motors, be assured of lifetime employment, and hope to rise to a general manager or vice-president position by the end of his career. His compensation was largely a fee for devoting his hours to the company, and he was assured of pension in his post-retirement life.

A 21st century corporation employee, in contrast, brings her contribution of intellectual capital as a building block of the company. This is akin to a shareholder contributing initial dollar capital to the company. During her employment, she enhances her knowledge, which she can then use at another company or to start her own venture.

Thus, in both contribution to and reward from the company, a 21st century employee has become more like a shareholder or partner than a machine, selling productive hours. To be a valuable partner in a new corporation, an employee must obtain an advanced degree in a science, technology and math (STEM) field, which increases the demand for STEM graduates but widens the wage gap between those with and without college degrees.

A 21st century employee must keep updating her knowledge and skills to remain employable.

These developments pose large challenges but also create new opportunities for policy-makers. Local governments must compete to attract an upcoming 21st century corporation and can no longer rely on their natural resources. For example, cities competed fiercely to be chosen as the home for Amazon’s second headquarters.

The most essential prerequisite to attract these 21st corporations is the ready ability of STEM graduates with a passion for innovation and critical thinking. That need is met from the pool of talented locals and well-educated immigrants.

This means we need to rethink the amount of resources devoted to public universities, so we can produce more STEM graduates. And we must alter policies in order to invite more graduate immigrants and create a vibrant culture to attract millennials.

In addition, newer businesses require advanced communication networks and technology parks, instead of the warehouses, roads, power and ports required by a 20th century corporation.

Governments must also redesign tax policies to derive a fair share from the value created by modern corporations. Previously, a government could track, monitor and tax business activities based on the movement and transformation of physical goods. A modern corporation has no physical goods and can easily set up a phoney head office in a tax haven, deliver its goods from a remote server, and avoid paying taxes by transfer pricing schemes.

The corporate sector remains the single largest source of wealth creation and employment generation, but it’s undergoing seismic shifts. Banks, investors, local suppliers, students, policy-makers and local governments will all benefit from a better understanding of these changes. That understanding will help them ward off threats and capitalize on new opportunities.

Anup Srivastava is an Associate Professor at the Haskayne School of Business at the University of Calgary.

Disruption has reshaped the corporate sector

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