Decreasing lifespan of S&P 500 companies show that concept of innovation is rapidly evolving. Today, innovation goes way beyond the creation of one big new idea, it is new business imperative, a matter of culture – and it is, or it ought to be, a sustainable and continuous process

The world we live in today, the era of technological disruptions, has drastically reduced companies lifespan. Professor Richard Foster of Yale University, shows in his work Creative Destruction Whips through Corporate America, that the average lifespan of a company listed in the S&P 500 has decreased by more than 50 years in the last century, from 67 years in the 1920s to just 15 years today, and at the current churn rate, 75% of S&P 500 companies will be removed from the index by 2027.

 

One of the terms that best describes this phenomena is  “creative destruction”, credited to the economist Joseph Schumpeter (1883-1950), who studied the formation and bankruptcy of companies in Europe and the United States. He concluded that “economic progress, in capitalist society, means turmoil.” Professor Foster, applied Schumpeter’s theory to the modern practices of management and innovation.

According to Foster, the life span of a corporation is determined by balancing three management imperatives:

  • running operations effectively
  • creating new businesses which meet customer needs
  • shedding business that once might have been core but now no longer meet company standards for growth and return

The main issue is that the innovation that is needed to create significant new businesses can often directly conflict with the operational effectiveness of the current business. The companies struggle to follow the pace of their industry, and eventually most of them fail because they focus on short term solution instead on a long term evolution.

The McKinsey research on disruptive technologies gives us a closer look at its power of creative destruction: “over the next ten years, the evolution and adoption of now established digital technologies-the mobile Internet, cloud computing, the “Internet of Things,” and the increasing automation of knowledge work-will be buttressed by new breakthroughs in fields such as advanced robotics, next-generation genomics, 3-D printing and energy storage. The potential total impact: as much as $33 trillion a year in additional economic value creation by 2025. That’s a lot of opportunity, but it also promises massive shifts in profit pools, big changes in consumer behavior, and a hungry host of new entrepreneurs eager to shake up the status quo.”

The harsh truth of our “digital disruption” era is companies that fail to innovate risk extinction. Continuous innovation must become the new imperative of modern businesses, as the force with a unique transformative power that can create (or destroy) value in very short periods of time (inc.com).

 

Sources:

Creative Destruction Whips through Corporate America

http://www.bbc.com/news/business-28865268

http://iveybusinessjournal.com/publication/reinventing-innovation/