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Expert: Cutting-edge gains not always death knell for old-guard firms

Jan Dennis, Business & Law Editor
217-333-0568; jdennis@illinois.edu

11/27/2007

Rajshree Agarwal
Click photo to enlarge
Photo by L. Brian Stauffer
Illinois business professor Rajshree Agarwal argues that innovation isn’t necessarily a death knell for companies that wind up on the wrong side of the cutting edge.

CHAMPAIGN, Ill. —  For every technological breakthrough that spawns new industry giants such as Microsoft or Intel, old-guard companies wither or die, according to an evolutionary theory of capitalism embraced for well over a half-century.

Economist Joseph Schumpeter’s cyclical concept of “creative destruction” has long been used to explain radical business shifts, from the decline of railroads when highway and air travel took off to Polaroid’s slide as new technology rendered its once-revolutionary Instamatic outdated.

But a new research paper co-written by University of Illinois business professor Rajshree Agarwal argues that innovation isn’t necessarily a death knell for companies that wind up on the wrong side of the cutting edge.

Agarwal, an award-winning author whose research includes the evolutionary lifecycle of industries, says her study shows mainstream firms routinely hitch onto changing technology and continue to prosper through an alternative process that she calls “creative construction.”

“Up until now, there was almost an assumption that creative destruction was a given. What we’re hoping to do in this paper is say, ‘Look, that’s just one of the paths. But it’s a choice you make as to which path you follow,’ ” said Agarwal, whose paper will be published next year in the inaugural issue of the Strategic Entrepreneurship Journal.

Companies that weather technology breakthroughs typically embrace change, Agarwal said. Those firms encourage workers to think creatively and sink money into innovative ideas – even when they net spin-off ventures that seemingly create competition.

“If you think about it not so much in terms of competition, but as creation and innovation, now you have more than enough room for everyone to grow,” said Agarwal, the John Georges Professor of Technology Management and Strategy in the U. of I. College of Business.

Agarwal says America’s corporate landscape is littered with companies that have thrived despite the emergence of higher-tech firms launched by creative workers who moved on.

Hewlett-Packard, for example, benefited from high-tech advances that followed when former employee Steve Wozniak launched Apple, Agarwal said.

“One can think of Apple as being a competitor to HP in one sense,” she said. “But in another sense, Steve Wozniak left HP with the microprocessor HP wasn’t doing anything about, using it only for calculators. Apple then fueled the early growth of the personal computer industry, where HP has actually done very well.”

Agarwal says Schumpeter’s theory of “creative destruction” doesn’t address where new-generation companies come from, and scholars have traditionally assumed they rise out of nowhere, “like manna from heaven.” Her research challenges that notion, maintaining that existing firms play a part through a “knowledge spillover that creates entrepreneurship opportunities.”

“Processes have to die, but businesses don’t. IBM has now recreated itself three times over and remains a strong firm,” said Agarwal, who co-wrote the study with David Audretsch of the Max Planck Institute of Economics in Germany and MB Sarkar of the University of Central Florida.

Companies that fall victim to innovation are typically short sighted, failing to encourage forward thinking by employees and overlooking creative ideas that surface, Agarwal said.

“It all depends on how proactive the existing firm is,” she said. “If it’s a firm that systematically foregoes the opportunities it creates, clearly it’s on the path to destruction. That destruction isn’t because of the new firm, but because of their own failure. It’s not the competition from outside, but their own inability to hone in on an entrepreneurial opportunity.”

Editor’s note: Contact Agarwal by calling 217-265-5513; e-mail: agarwalr@illinois.edu.