What Turns Some Companies into ‘Superstars’?

Ram Shivakumar: So the concept of the economic superstar originated in a paper written by the late Chicago economist Sherwin Rosen. In this paper, Rosen identified the economic conditions that give rise to superstars: first, the ability to reach a very wide audience, and second, the uniqueness of the product or service.

The five superstars that almost all of us are familiar with today are Alphabet, parent company of Google; Apple; Amazon; Facebook; and Microsoft. Together, these five superstars earned $810 billion last year and had an economic value in excess of $4 trillion. The archetype superstar is Google, which was established in 1998 to organize the world’s information. At the turn of the century, Google had no revenues and no established business model, but fast-forward 18 years and 700 acquisitions later, Google has $810 billion in revenue. So in almost every industry, a small number of companies is capturing the lion’s share of profits.

According to a recent study by the McKinsey Global Institute, the top 10 percent of all firms worldwide with revenues in excess of $1 billion earned 80 percent of all the profits earned. The middle 60 percent of firms earned close to zero economic profits, and among the bottom 10 percent, on average each firm lost about $1.5 billion over a three-year period.

Undoubtedly, chance events have played a significant role in the success of many companies, but chance is not the only thing that separates superstar companies from the rest. Dominance in information technology and data analytics has allowed superstar companies to acquire the killer combination of scale and scope, serving a variety of products to millions, maybe even billions of consumers.

So in order to understand the evolution of businesses and industries, it’s useful to refer to an idea that first emerged in ecology. The fitness landscape model, introduced by the geneticist Sewall Wright, asks this question: What is fitness a function of? How do attributes of a species influence its fitness? Think of fitness as reproductive capacity, or survival.

Let’s take a simple example. Supposing, for instance, we consider a gazelle, and we take one of its attributes: the size of its legs. Imagine that on the horizontal axis of a two-dimensional figure, we measure the thickness of a gazelle’s legs, and on the vertical axis, we measure its fitness. If a gazelle’s legs are so thin, or very thin, it will not survive. If they’re excessively thick, it will not survive. In fact, as its legs get thicker from zero, its survival increases, and beyond some point, it begins to decrease.

So we think of this—or evolutionary scientists think of this—as a Mount Fuji–like figure. Of course a gazelle’s ability to survive depends more than just on the thickness of its legs. It depends on its other attributes: the size of its body, the size of its head, the sharpness of its teeth, and so on. So Sewall Wright postulated that in fact, the fitness landscape is not a Mount Fuji–like figure, but more like a rugged landscape, a mountain range, because all of these attributes interact with each other.

In a very influential paper, Daniel Leventhal postulated that the fitness-landscape model could actually explain the evolution of industries. He argues in his paper that industries evolve not only because of population levels’ selection effects, but because of adaptation by firms. So think of market value as a proxy for fitness, and think of the variety of attributes that a company possesses—from its choice of product, service, markets it serves, its management style, its organization. All of these attributes interact with each other to produce a certain fitness level.

Of course, the firm’s fitness level depends not just on what it does, but on what others do, and other features of the ecosystem. So what the rugged landscape means is that firms within a given industry will adopt very different strategies and tactics. So in any given industry, you will find companies pursuing different approaches, different methods, different organization systems. So if you look at, for instance, Federal Express and UPS, you will see that they have very different organizational methods, because they’ve had different histories. The rugged-landscape model basically says that where you start off from matters, and because we have a very partial view of the landscape, in any given industry, firms have very different approaches to solving a problem.

So there is another complication. The rugged landscape keeps shifting. It keeps shifting because firms are changing their strategies and tactics. The environment itself is changing. The economic system is changing. A firm might find itself on top of the highest peak today and find itself on a smaller peak tomorrow.

This is exactly what happened to Research In Motion, the maker of the BlackBerry. In 2007, BlackBerry’s market share was 44 percent. The iPhone was introduced into the market, but no one expected the iPhone to replace the BlackBerry. That’s exactly what happened. Failure in the rugged-landscape model occurs in one of two ways: the inability to climb a hill, or climbing the wrong hill.

Why is it that firms fail to climb the hill? Because they lack the competencies; they lack the management systems; they lack the routines; they lack the organizational cultures. [Stanford’s] Nicholas Bloom and his coauthors have shown in a series of papers that best practices in management are not widely followed, not even in countries like the United States, whose average management scores are quite high.

Let’s talk about the second kind of failure: climbing the wrong hill. The best example of this is Sears, which filed for bankruptcy in 2018. Sears’s failure can be traced to a series of bad decisions going back 50 years or so. In the late 1970s, its CEOs decided that the future for Sears was not in retailing but in financial services. So it committed itself big time to financial services. It acquired Coldwell Banker, Dean Witter Reynolds, and many others. It was during this time that other competitors like Wal-Mart and Target were beginning to grow their business. All during the 1980s, the financial-services business of Sears struggled, and it was only in the 1990s that Sears leaders committed to divesting its financial-services business, but by then it was too late. The other competitors had raced far ahead.

Ultimately, superstar companies are succeeding today because they have discovered the art and science of bottom-up innovation: lots of experimentation, a tolerance for failure, and the application of leverage when the forces are with them.

So there are four things to bear in mind as you lead your organization through the terrain ahead: First, listening and engaging with a very wide variety of models and opinions. Second, being ready to change your mind. Third, being very opportunistic in the way you make decisions. And finally, doubling down on what works.