I recently read a study on the turnover in the S&P 500 index from Innosight exploring the average length of time that companies were a part of the index as well as the the competitive trends that are causing this average to drop significantly from 33 years in 1995 to just 24 in 2016.
If I had to sum it up in one word it would be Technology. From technology platform businesses (traditional hub businesses such as Facebook, Google, Apple, Microsoft) to the digital disruption in retail (Amazon, Amazon, and... oh, Amazon), to peer to peer technology companies (Airbnb, Uber, Lending Club and more)... it is clear that the technology is fundamentally altering how people do business, interact, and live their lives. There are wonderful efficiencies to be gained from moving our lives from the physical world to the digital, but the sword cuts both ways.
The shifting economic ground that many companies thought was rock solid is beginning to give way to newer, nimbler companies embracing new technologies that are putting painful pressures on old stalwarts (most of brick and mortar retail, hotel industry, old media companies). On the one hand, new technology is always exciting, but on the other, as technological innovations expand into new industries, investors evaluating businesses as potential long term investments must be on guard from a technological standpoint. As the master Warren Buffet once stated in his 1987 annual letter:
"Experience, however, indicates that the best business returns are usually achieved by companies that are doing something quite similar today to what they were doing five or ten years ago. That is no argument for managerial complacency. Businesses always have opportunities to improve service, product lines, manufacturing techniques, and the like, and obviously these opportunities should be seized. But a business that constantly encounters major change also encounters many chances for major error. Furthermore, economic terrain that is forever shifting violently is ground on which it is difficult to build a fortress-like business franchise. Such a franchise is usually the key to sustained high returns."
This isn't to say that Google or Apple, two wonderful franchise type businesses, are at risk from a technological standpoint simply because they are IN the technology industry. Rather, industries at risk for technological innovation and disruption must be treated with care by investors. Time is the friend of the wonderful business, but to be wonderful over time requires a strong and durable competitive advantage. As the study above makes clear, technological innovation is only going to continue, if not accelerate, at the current pace. This, in my opinion, offers both opportunities in the form of new franchise investment opportunities that are levered to technological innovation, as well as treacherous risks to current franchise businesses.