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Innovation: scourge or blessing?

January 08, 2012

Avoiding Innovation's Terrible Toll is the headline for an article in the Wall Street Journal's management section which explores the life span of corporations. The Journal cites a study conducted by two management professors that spanned over six million firms and came to the conclusion: that only a tiny fraction (of firms) reach the age of 40.  And with the rapid pace of technological change the lifespan is likely to be shorter in the years to come.

Some key observations of the study include insights from business leaders, academics and venture capitalists, all of whom say that "large companies that do manage to survive are ruthless about change. The most successful ones aren't afraid to cannibalize their big revenue generators to build new businesses."  Successful (those with longer lifespans) firms "often make frequent—but, crucially, small—acquisitions that bring in new technologies and open new markets. And there's always the unpredictable role of luck in business—both good and bad." Notably, firms that were "felled by creative destruction tended to be bureaucratic, played too much defense, and tried to catch up too late by lurching into huge acquisitions.

Many of the foregoing conclusions ought to be somewhat intuitive particularly in a very competitive marketplace. In a free market, something the Journal consistently espouses, innovation's effects ought to be viewed more as a blessing than a "toll". America's hotel industry abounds with examples where both companies and individual hotels have ceaselessly innovated to survive the ravages of competition.

Holiday Inns, for instance, grew to be an industry behemoth in little over a decade and reached its pinnacle in the late 60s but by the early 70s found its assortment of businesses like the Trailways bus corporation and its circular towered hotels were eating away its primacy.  The company retooled by divesting deadbeats while incorporating new brands like Hampton Inns, a process that continues to this day. The same is true of a host of other firms and individual hotels that continually come up with innovative concepts including some highly innovative ones such as the Gastwerk Hotel in Hamburg, Germany, formerly a 19th coal plant.

Joseph Schumpeter, the Austro-Hungarian who put forward the idea of "creative-destruction" as essential for a thriving economy likely would have cited the hospitality industry as exhibit-1 for the notion that innovation is unambigously a plus.

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