It’s a common question thrown at me by entrepreneurs, venture capitalists, or the more cynically minded corporate leaders.
That is, why bother trying to innovate if no matter what they do, large companies can no longer maintain a sustainable advantage and their life spans are just getting shorter and shorter? Isn’t it better to hasten Joseph Schumpeter’s process of creative destruction and move capital and employment from inefficient dinosaurs to more vibrant and agile upstarts?
I give them three reasons.
First, timing matters. There’s a difference between recognizing and preparing intelligently for an inevitable transition (or even an inevitable demise) and throwing a still-thriving business away prematurely. Creative destruction carries transaction costs. People lose their jobs. Cities dependent on a large employer suffer. Know-how and other assets carefully built over years or decades are destroyed. Certainly, those transaction costs have to be balanced against the drag created by bloated bureaucracy, and the soul-crushing work that characterizes too many companies. But it is a cost nonetheless. Schumpeter himself posited that creative destruction, which he called “the essential fact about capitalism,” would lead to capitalism’s demise because of a backlash against the chaos it unleashes.
Second, the world of start-ups is narrowly focused. Start-up companies tend to cluster in industries favored by venture capitalists (like biotechnology or information technology) or ones where there are relatively low barriers to entry (like restaurants).
Technology-based companies can drive transformation in many existing markets of course – just look at the battles brewing between traditional taxi companies and Uber, a mobile app that connects passengers with drivers. But other fields, like mining, construction, agriculture, and many types of manufacturing, have been largely ignored by start-up companies. In these markets if existing companies don’t rise to the innovation challenge, no one will.
Scott Anthony is the managing partner of Innosight.