Building a Competitive Software Capability: Creative Destruction

In this excerpt from Leadership, Teamwork, and Trust: Building a Competitive Software Capability, Watts Humphrey and James Over explain why these changes must be a high priority for software companies and other organizations for whom knowledge is a valuable asset.

Change is a fact of life. The world is changing faster than ever before, and the challenges of tomorrow will almost certainly be different from and more demanding than those of today. While no one can say precisely what these challenges will be or how to prepare for them, some things are pretty obvious from our recent history.

Corporate Churn

The first new phenomenon that is obvious from our recent history is corporate churn . Industry leaders always fail, and sometimes they fail surprisingly quickly. Consider, for example, what has happened to the largest and most successful US businesses. In the twenty-four years from 1956 to 1980, twenty-four firms dropped off the Fortune 500 list every year. However, in the twenty-four years from 1982 to 2006, that rate increased to forty firms every year [1]. That comes to 960 seemingly successful firms switching from being winners to being losers in twenty-four years.

Joseph Schumpeter studied the reasons for corporate churn and, in 1942, published a book called Capitalism, Socialism and Democracy [2]. In this book, he explains why organizations grow, prosper, and die. He called this concept "creative destruction." While his ideas were not well accepted at the time, they are now widely recognized as perceptive and prescient. He describes why economies are in constant flux in the following way:

The fundamental impulse that sets and keeps the capitalist engine in motion comes from the new consumer goods, the new methods of production or transportation, the new markets, the new forms of industrial organization that capitalist enterprise creates.

Schumpeter's work also suggests why market leaders are so often surprised by their newer and more agile competitors. It is because the rules of the game keep changing.

As soon as quality competition and sales effort are admitted into the sacred precincts of (economic) theory, the price variable is ousted from its dominant position.

While Schumpeter's ideas sound reasonable and are now widely accepted, he does not say where these giant-killing new competitors come from. Just who are they and why are they able to topple large and established businesses?

Just as they have in the past, the challengers to industry leaders will come from unexpected quarters. These newcomers will be entrepreneurs who have found some innovative new way to make themselves unique. This has been true in a great many industries, and as indicated by the relative vigor and productivity of small businesses, it is likely to remain true in the future. The innovative advantages of small businesses are indicated by the fact that in the United States, small businesses produce many more new jobs and grow much faster in percentage terms than their larger competitors.

Consider, for example, a recent Small Business Administration study [3]. Over a three-year period, new and small companies accounted for only 25 percent of employment but for 39 percent of job growth. This means that, on average, small businesses grew nearly 60 percent faster per capita than their larger competitors. Clearly, being a small business has had some pretty significant advantages. Change is the name of the game for modern industry. Those organizations that do not recognize and plan for the often obvious future trends of their industries will almost certainly be replaced, and it could happen very quickly.

Knowledge Work
Assuming that Schumpeter was correct and that the rules of the game are continuously changing, a high priority for executives should be identifying those changes that will impact their businesses. Once these changes have been identified, executives and senior managers can better judge how and when to make the adjustments needed to capitalize upon

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