Creative Destruction : Dismantle to conquer

08 November 2006

In today's constantly transforming business ecosystem, creative destruction may be the way for the once-mighty to rule again, says Chris George, vice chairman and CEO, EBS Worldwide

Most of us in the business world today recognise that change is a necessary part of our environment; some fear it and others embrace it. And then there are those who cause this change intentionally, often going against the stream, reinventing themselves, and their business models, causing a paradigm shift within the DNA of their enterprise. As early as 1942, the noted economist Joseph Schumpeter called this process of forced transformation 'creative destruction'.

In the lifecycle of an enterprise, constantly keeping pace and maintaining high standards alone may not be good enough. A forward looking company continuously thinks of ways in which to be successful in the long run and, when the long-term validity of its business model becomes suspect, it may think about undergoing a major change in the way it conducts business; sometimes it may require to destroy it altogether.

Take the example of IBM, which decided to sell its PC business to Lenovo of China, making that company the third largest PC manufacturer in the world (it was ninth largest prior to the deal). Even prior to this deal in December 2004, IBM had begun systematically moving out of its commodity hardware business, selling its PC factories in the US state of North Carolina to Sanmina-SCI and its hard drive unit to Hitachi.

IBM created the PC on August 12, 1981, and stayed in the business for over two decades. Its name is inextricably linked to the term 'PC'. But, over the years, IBM transformed its business to become a services-led business, adding $85 million to its net income. Although the company had made the PC a global phenomenon, it actually made very little money from selling PCs, and often lost money from it. When the deal was announced, IBM CFO Mark Loughridge said, "While we will have less revenue, we will have an improved financial profile."

What drives companies like IBM to such bold and controversial steps? Simply put, it is the idea of pure business sustainability. Companies that once revolutionised and dominated new industries have seen their profits fall and their dominance recede as new competitors launch better products more efficiently, at lower prices.