In 2005, Paul Otellini became the new CEO of Intel, America’s premier semiconductor designer and manufacturer. He was the first CEO of the company not to have a background in engineering. Sometime shortly thereafter, Otellini entered discussions with Steve Jobs on whether Intel would manufacture the chips needed for Apple’s secretive, potentially revolutionary new project: the iPhone. Ultimately, Otellini declined. He thought the initial costs would be too high and the resulting sales too low. Since then, Apple has sold 2.3 billion iPhones. Intel flatly missed out on the mobile computing revolution ushered in by Apple, which put Intel’s competitors in various domains—including companies like Samsung, TSMC, and most significantly Arm—squarely in the leading position that Intel once had.
The same year that Otellini took the reins at Intel, James McNerney became the new CEO of Boeing, America’s one and only manufacturer of large passenger airplanes and a key contractor to NASA and the Pentagon. Like Otellini, McNerney was an MBA—Master of Business Administration—not an engineer. Though he wasn’t the first non-engineer ever to lead the century-old company, he was the first without any previous experience in aerospace. Aiming to cut costs, McNerney determined that, rather than designing and building a whole new plane, the company would simply modify one of its key planes, the 737, to be the new and improved 737 MAX. Not long after entering service a decade later, two of these updated planes inexplicably crashed shortly after takeoff, killing a combined 346 people. The cause was a convoluted series of poor and ultimately fatal design choices that Boeing had not disclosed to pilots, in order to preserve the marketing fiction of a merely updated plane, rather than a new one, which would have required the, in hindsight, comparatively trivial burden of retraining pilots.
While Otellini and McNerney were taking charge, across the Pacific Ocean another chief executive was wrapping up his term. Nobuyuki Idei had become the CEO of Sony in 1999, becoming responsible for Japan’s most innovative consumer electronics and entertainment company. Three long, consecutive tenures by founding engineers had turned Sony from a radio repair shop amidst the ruins of post-war Japan into a global conglomerate that gave the world the Walkman, the CD, and the PlayStation, among many other state-of-the-art electronics products. Idei was the first CEO not to have a background in engineering. He decided to reorganize Sony to be “independent from past glory and the founders’ shadow,” adopting modern managerial techniques and structures. Since he left, Sony has not produced a single new transformative electronics product.
Since 2021, Intel’s revenue has crashed by a third. Since 2018, Boeing’s has fallen by a quarter. Sony’s revenue hasn’t meaningfully grown since 2008. It is easy to tell when a company stalls or stumbles. But it takes a meticulous, in-depth investigation to determine whether such failings are evidence of organizational dysfunction, or just the temporary setbacks and necessary hurdles that any competent organization might face. When failures can be traced to bad strategy or structure, the mistake’s origin might already be decades in the past. It is remarkable that three modern-day high-tech companies, at the tops of very different fields, all made catastrophic strategic errors apparently as soon as they put outsiders to the company’s technical tradition of knowledge in charge. They are unlikely to be the only similar cases in the global economy.
The unusual 21st century dynamism of software founders seeking to transform society, create behemoth business empires, or achieve technological feats straight from the pages of science fiction has both exaggerated the contributions of software to the whole economy in the public mind and obscured how many other economic sectors are dominated by inert dead players. Everyone pays attention to the latest chips and chatbots produced by Nvidia or OpenAI. But what is going on in the chemicals industry? What are the latest innovations in refrigeration technology? Have we found that cure for cancer yet? Or that room-temperature superconductor? What are all of the non-software companies even doing all day?
The Divergent Aims of Modern-Day Companies
The problem of companies being enthusiastically managed into irrelevance is often simplified to blaming MBAs, but this doesn’t tell the whole story. Although Intel’s Otellini and Boeing’s McNerney were MBAs, Sony’s Idei was just a career manager who went to college in Japan. Jeff Immelt, an MBA, presided over the precipitous decline of General Electric from 2001 to 2017. Yet his notorious predecessor for twenty years, Jack Welch, is often held equally responsible—and he had a PhD in chemical engineering. Westinghouse, once an American industrial conglomerate with a major line of business in building nuclear reactors, undertook a seemingly absurd and ultimately fatal pivot into becoming a media company in the 1990s. The man who led that change, Michael H. Jordan, was a chemical engineer by training too—though also a former McKinsey partner.
Rather, the problem seems to stem from a particular way of thinking about what a company even is, what its goals are, and what measures are or are not appropriate to achieve those goals. In simplified terms, we can think of companies as organized to create value and sustain themselves by capturing a portion of the created value as financial profit. When executives, board members, and major investors manage companies by and for the bottom line, they operate on a theory of the company as a vehicle solely for capturing profit. When this happens, the difficult and holistic question of creating value in the first place—a question unique for every company—simply goes unaddressed. It is treated as a permanently solved, one-time problem that no longer merits attention or resources; at Boeing, for instance, senior engineers were reportedly told they were no longer needed because Boeing’s products were “mature,” as if it was impossible for further progress in airplanes to ever be made. The focus is instead on raising profit margins and share prices through cost-cutting and various other attempts to improve efficiency or appeal to investors. This school of thought appears to be the dominant one in the influential U.S. financial sector and might be termed “shareholder capitalism.”
A distinct but also ascendant school of thought might be called “stakeholder capitalism,” as promoted by economists like the World Economic Forum’s Klaus Schwab and institutionalized through measures like “ESG” or “DEI.” Rather than harshly optimizing for capturing profit, this school of thought essentially teaches that the value companies can create is not limited to financial value for shareholders or useful products for customers, but also includes intangible value for a company’s own employees, society writ large, the government, and even the natural environment. A company can legitimately create value by mobilizing its managers and employees to participate in efforts to solve problems entirely unrelated to a company’s unique specialties or product offerings. In practice, this means companies mainly try to imitate new fashions or implement received wisdom in an undifferentiated way.
There does exist a school of thought that teaches that a company is meant to create as much value as possible through specialization and breakthrough improvements in products. But it appears to be largely limited to the software engineers of Silicon Valley, only semi-institutionalized through organizations like Y Combinator or the bottom-up cults of personality surrounding exceptionally successful startup founders and venture capitalists. Outside of software and the few domains where former software entrepreneurs have already founded new market entrants, creating more unique and tangible value is at best a secondary concern after capturing more profit or contributing to the intangible value of a society with socially conscious firms.
This implies that much of the modern economy is not even trying to undertake productive economic activity as it is commonly understood. Though surprising, this conclusion seems to provide a satisfying and elegant explanation for many contemporary socioeconomic mysteries. Though MBAs, financiers, managers, or accountants are perhaps more inclined to view a company as a vehicle for capturing profits or intangibly contributing to society, there is nothing preventing trained engineers from inclining toward the same views as well. After all, engineers are formally trained in engineering, not in an alternative theory of business management.
When Intel passed on the iPhone, it was forgoing an expensive and complicated project in many ways at odds with the technical attributes of Intel’s more arcane and power-hungry chips, which were more suited for desktop computers than phones. This saved Intel a lot of money in the short run. But in the long run, it amounted to giving up Intel’s leadership in a still rapidly-growing computing industry. Both value creation and profit capture would have likely been better served in the long run by taking the chance and using it as an opportunity to mobilize Intel’s engineers. Boeing should not have risked the integrity of its traditions of engineering and manufacturing to cut a few financial corners. Sony did not have to stop experimenting with new consumer devices. There was no inevitable condition of physics or markets that necessitated these companies’ decisions, only the contingent and avoidable succession failure that resulted in leaders unable to create value.
Every company attempting to achieve a particular material outcome—whether this means building the most advanced semiconductors, the most reliable airplanes, or the most popular electronic devices—is an extremely fragile organism behind the gleaming headquarters, world-renowned brand, and army of salaried professionals. Without attentive, zealous, and knowledgeable leadership from the top, even the most well-resourced companies will quickly devolve from innovation and functionality into stagnation and dysfunction, as the local, day-to-day priorities of employees and executives diverge from the overall mission and wider circumstances change without a commensurate change in strategy. The careful alignment of people and priorities needed to deliver efficiency, quality, and innovation can be irreparably shattered with just one chief executive who temporarily prioritizes a different goal.
Industries in the Absence of Industrialists
Without fresh founders and seasoned industrialists seeking to create value through breakthroughs in science, technology, design, or logistics, industries and the companies they consist of do not disappear entirely, but limp along outside the public eye. Interestingly, they also morph in a distinct way, developing certain features very different from companies in a competitive and growing industry.
One unmistakable pattern is what I term the “portfolio theory of the firm.” This is the phenomenon of executives, board members, and investors treating a company not like a single, fragile organization of human beings, but like a grab-bag of different assets that can be rearranged or traded out until the sum of their financial figures adds up favorably—like an investment portfolio. The company becomes not the organization itself, but the financial product wrapped around it. Such companies demonstrate a strong tendency for regular acquisitions, mergers, divestments, spinoffs, rebrands, and internal reorganizations, as executives tear apart and stitch together new combinations of brands and divisions in the quest for the ideal bottom line.
Such an approach works fine for trading stocks or other financial products, since there are no externalities to making exchanges. But every corporate reorganization creates friction and uncertainty for the hard workers being reorganized, and creates more opportunities for the wrong people to be fired and the wrong programs to be axed. Both of these are negative externalities that damage a company’s ability to function. More importantly, it prevents visionary leaders from taking charge and reorganizing companies to optimize for technical prowess, logistical scale, or some new grand ambition. Each further recombination makes it politically harder for a live player to “unfuck” a company in the future.
A perfect example of such a portfolio-fied company is the defense contractor until recently known as Raytheon, now known as RTX Corporation. Today, the missile, radar, and electronics manufacturer founded by Vannevar Bush is no longer an autonomous firm, but just one of three unrelated subsidiaries of RTX Corporation, alongside the aircraft engine manufacturer Pratt & Whitney and a new aircraft parts manufacturing subsidiary called Collins Aerospace, itself put together from a slew of earlier acquisitions and reorganizations. The CEOs who merged their companies to form the new alphabet soup corporate entity were unusually honest about their rationale: since “about 50 percent of the business will be domestic, 50 percent international, 50 percent defense, and 50 percent commercial,” the resulting company would be more “resilient.” Unrelatedness was not a bug, but a feature, since then no difficult technical or logistical integration would be necessary and the company’s stock would be a more stable financial product. The ideal company, one imagines, must then be one with 100 different unrelated products providing exactly 1% of revenue each. The CEO of RTX Corporation is a lawyer.
The defense industry is rife with such cases, with some technically specialized companies like solid rocket motor manufacturer Aerojet Rocketdyne getting traded around like hot potatoes by larger defense contractors. The pharmaceutical industry is also a prime case study in the portfolio theory of the firm. The fortunes of pharmaceutical companies are defined, by and large, just by what roster of new, incrementally-better medications the company has managed to recently produce and license or—just as often—acquire from someone else. There need be no scientific or medical rhyme or reason to a pharmaceutical company’s roster of drugs, whether over the short or long term, only that they all hopefully sell well and at high prices. AstraZeneca, for example, turned its fortunes around by betting on a new lung cancer drug, while its second-best-selling drug was for diabetes. Prior to the COVID-19 pandemic, Pfizer’s best-selling drugs ranged from pneumonia vaccines to treatments for breast cancer and epilepsy.
While perhaps a fine way to reliably generate profits, it is not these portfolio-fied companies that have been responsible for the greatest leaps forward in pharmaceutical science. The company behind semaglutide—the chemical in the breakthrough weight loss drugs Ozempic and Wegovy and an apparent cure for obesity and diabetes—is Denmark’s Novo Nordisk, which was founded a century ago by Nobel Prize-winning physician August Krogh to manufacture insulin, and has hewed almost exclusively to studying endocrinology and selling diabetes therapeutics since then. As in contrast to Intel or Sony, it is creating unprecedented value that proves to be the superior strategy for financial performance: at $600 billion, Novo Nordisk is the single most valuable company in Europe and nearly twice as valuable as the second-ranked company, Louis Vuitton.
When just one company in an industry is deprioritizing tangible value creation, this is most likely to be manifested as something like gratuitous cost-cutting or dodging risky new bets. But when most or even all relevant companies in an industry are, it becomes possible to coordinate to pursue these goals cross-company, since companies are no longer directly competing with each other in a zero-sum battle for customers’ dollars, but pursuing the same non-rivalrous goals of squeezing out profits or trying to contribute to various imagined public goods. Rather than being loyalists to a particular company and its people, executives freely move back and forth between supposedly competing companies and begin seeing themselves as a class of interchangeable stewards for “the industry,” who deserve similar pay, benefits, and status owing to their membership in this implicit collective leadership. Cutthroat competition is the last thing they want.
Ironically, a concentration of companies focused on capturing profits results not in Darwinian creative destruction, but a medieval guild-like structure. That this dynamic is visible even in the modern era gives new weight to the immortal words of Adam Smith that “People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the publick [sic] or in some contrivance to raise prices.”
Companies Deserve Merciful Deaths or New Life
The most impressive, dynamic companies look not like portfolios, but disciplined squads with a single-minded, laser focus on achieving one clear mission, whether that is understanding diabetes like Novo Nordisk or, say, making electric cars better than gasoline cars like Tesla. Elon Musk, in fact, helps illustrate another key difference between companies that are focused on creating value and companies that aren’t. Another way to describe the portfolio theory of the firm is that its adherents believe every company is just a holding company waiting to be born. But while holding companies rightly carry the connotation of existing mainly to take advantage of legal, regulatory, investment, or tax privileges, they are superficially similar in structure—diversified, unrelated businesses—to what we call conglomerates, evoking the functional and often family-run industrial conglomerates of East Asia like Samsung or Mitsubishi.
The difference between a holding company and a conglomerate is that a holding company is optimizing for passive financial performance, whereas a conglomerate is optimizing for strategic autonomy. A holding company collects paper titles to existing monetarily valuable assets. A conglomerate applies a living tradition of knowledge in industrial planning and business management to new domains, expanding by mobilizing more people to create new value. With a diverse array of often vertically-integrated companies or subsidiaries under the control of a single chain of command, sweeping grand plans that would be prohibitively costly or complex for a smaller or narrower company become possible.
In South Korea, the chaebol conglomerates like Samsung or Hyundai do not legally exist under a single corporate hierarchy, but are informally tied together by a single family, top deputies, supplier relationships, and cross-shareholdings. Given some of the reporting on sharing of personnel, knowledge, and family board members between Tesla and SpaceX—not to mention the CEO—perhaps the companies in the orbit of Elon Musk are also better thought of as just part of a single Musk chaebol. We just lack the words and concepts to label such organizations in modern America.
The modern American company has a peculiar life cycle. Rather than ending in a timely death, its life is often ended prematurely by succession failure. But it is then also prevented from resting in peace, instead propped up in a stagnant, zombie-like existence, prolonged by organizational inertia, opaque barriers to entry, and a relative shortage of competitive new market entrants, until it is inevitably chopped up into little pieces and rearranged into what are effectively unremarkable holding companies.
When a series of founders and founding engineers runs out, there are only two socially acceptable types of outsider executives who can be installed: those trained to capture profits and those trained to exert a company in service to intangible social goals. Until and unless a new source of executive training and thinking is built, one which teaches that companies deserve quick and merciful deaths or immediate and uncompromising resuscitation, even the most prestigious and cash-rich companies won’t be immune to zombification, and the most talented and ambitious men and women of each generation will choose to found new organizations rather than serve or take charge of old ones.