Monday 16 July 2012 8:09 pm

Creative destruction means corporate giants rarely outlast their usefulness

I LIVE just outside Hemel Hempstead, where one of its most famous landmarks has recently been converted into an apartment complex. Kodak Tower, as it is commonly known, was built in the 1960s as Kodak Eastman’s European headquarters. It’s a beaming symbol of the company’s presence in the town. Designed by Thomas Bennett, it was architecturally bold and divisive. When it was built, the American imaging company was one of the most famous in the world. Its degeneration into a tacky residential edifice is a stark reminder of the forces of creative destruction. The Austrian economist Joseph Schumpeter coined this phrase to capture the process of capitalism, whereby innovation always generates disruption. In no company is that better exemplified than Kodak. Founded in Rochester in 1889, Kodak became a global giant, at its height commanding about 90 per cent of the market for photographic film. And yet, at the turn of this year it filed for bankruptcy. Despite creating the first digital camera in the 1970s, its profits were driven by selling and developing film. It is a classic example of the difficulty in knowing when to lead innovation without undermining your existing strengths. The bottom line: monoliths are inherently vulnerable. One of Karl Marx’s critiques of capitalism was that it generates an increasing concentration of capital. Indeed, the fear that there’s a vicious circle between efficiency and scale still drives anti-monopoly legislation. But what is the empirical evidence? In 1987, Forbes magazine released a study looking at how large companies fare over time. It took the 100 biggest companies in 1917 and looked at what had happened to them since. Rather than see the big companies getting bigger, they found the opposite. As the chart shows, 61 per cent of the companies became defunct. 21 per cent still existed, but had fallen outside the top 100. That left only 18 of the biggest 100 companies in 1917 still there 70 years later. Of those, 16 companies underperformed the market as a whole, leaving just two companies that managed to “beat” the market. One of those companies was GE, and the other was Kodak. Fast forward 25 years, Kodak’s bankruptcy shows how rare it is for large firms to retain their strength. Consumers shouldn’t fear corporate giants – these behemoths should be fearful of becoming the next Kodak. Anthony J. Evans is associate professor of economics at ESCP Europe Business School.

City A.M.'s opinion pages are a place for thought-provoking views and debate. These views are not necessarily shared by City A.M.