Creative Destruction

Vic Napier, MBA


A few years ago a professor at a Texas university wondered how effective funneling tax funds to ailing local businesses was in terms of creating a positive business climate. What he found out was startling. It seems that the normal state of small local business is to go out of business! 

It’s well known that most small business startups will fail within the first few years of operation, but this professor looked at things a little differently. His data showed that even the most successful of businesses last only a few decades. The older a business is, the more likely it is to fail. After all, very few businesses are hundreds of years old. Even small businesses that cleared the initial hurtle of surviving for a few years will eventually cease to exist.

Why is this? What causes most businesses to fail in such short periods? Something must be done to increase their longevity – after all, jobs, paychecks and everything they provide depends on the health of the local economy, and a healthy local economy means business that survive, right?

Not necessarily.

Things change – services and products that everyone might want today may not be relevant or even needed in a few years. When gas prices took a dramatic increase in the 1970’s people started buying small fuel-efficient cars manufactured only by foreign auto companies. American auto manufacturers either went out of business or were bought by Japanese carmakers. Something similar thing happened with the restructuring of American industries in the 1980’s. Stalwart US corporations like US Steel, Corning Glass, and Kodak went out of business or moved to foreign countries, taking jobs and pensions with them. They had become so inefficient compared to their foreign competitors that their physical assets were worth more than their future profits.

The same thing happens to small businesses at the local level. Independent video rental stores have largely gone out of business because the selection and quality is so much better at national chains. Ditto for independent service stations, grocery stores and local independent banks. These businesses are no longer able to simultaneously give customers what they want and maintain prices at a competitive level.

And what happens to the people who owned or were employed by these businesses? They no longer have a job, which can result in a huge personal financial tragedy, and our hearts go out to them.

Imagine a map of your city, with every business represented by a little pinpoint of light. Every time a new business appears a new light comes on and each time a business closes a light blinks out. Now imagine that each second that ticks by represents one month. Every twelve seconds another year passes. The city you see in your mind’s eye would look like a mosaic of light with thousands, maybe tens of thousands of lights blinking on and off. Now imagine that you can see a grey cloud moving from the lights that blink out to the lights that blink on.

These people run the businesses and they constantly move from dead and dying businesses to new and thriving businesses. New and thriving businesses attract creative and innovative people – who until recently were working at dead and dying businesses. And that’s why business failures and job churn is not such a bad thing after all. It is a process that makes skilled people available to start new businesses based on fresh ideas and new perspectives.   



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