In today's constantly transforming business ecosystem, creative destruction may be the way for the once-mighty to rule again, says Chris George, vice chairman and CEO, EBS Worldwide

Most of us in the business world today recognise that change is a necessary part of our environment; some fear it and others embrace it. And then there are those who cause this change intentionally, often going against the stream, reinventing themselves, and their business models, causing a paradigm shift within the DNA of their enterprise. As early as 1942, the noted economist Joseph Schumpeter called this process of forced transformation 'creative destruction'.

In the lifecycle of an enterprise, constantly keeping pace and maintaining high standards alone may not be good enough. A forward looking company continuously thinks of ways in which to be successful in the long run and, when the long-term validity of its business model becomes suspect, it may think about undergoing a major change in the way it conducts business; sometimes it may require to destroy it altogether.

Take the example of IBM, which decided to sell its PC business to Lenovo of China, making that company the third largest PC manufacturer in the world (it was ninth largest prior to the deal). Even prior to this deal in December 2004, IBM had begun systematically moving out of its commodity hardware business, selling its PC factories in the US state of North Carolina to Sanmina-SCI and its hard drive unit to Hitachi.

IBM created the PC on August 12, 1981, and stayed in the business for over two decades. Its name is inextricably linked to the term 'PC'. But, over the years, IBM transformed its business to become a services-led business, adding $85 million to its net income. Although the company had made the PC a global phenomenon, it actually made very little money from selling PCs, and often lost money from it. When the deal was announced, IBM CFO Mark Loughridge said, "While we will have less revenue, we will have an improved financial profile."

What drives companies like IBM to such bold and controversial steps? Simply put, it is the idea of pure business sustainability. Companies that once revolutionised and dominated new industries have seen their profits fall and their dominance recede as new competitors launch better products more efficiently, at lower prices.

These new and more agile competitors then use their innovation to become market leaders, until even more efficient new entrants too in turn affect them. The one-time leaders have two choices; perish or - like IBM - move successfully into other lines of business in which they can sustain their advantage, fulfilling the laws of the capitalist ecosystem.

Other industries have their own examples. As digital cameras have become the first choice of people, they have forced companies like Konika-Minolta to re-think their entire business model. In March this year, Konica-Minolta exited the film and digital camera business and transferred part of its assets related to digital SLR cameras to Sony.

It will also ease out of colour film and colour paper production by the end of FY 2007. The expected outcome for Konica-Minolta is to become a more powerful corporation by meeting market changes and focusing on the digital photography business.

Another Japanese company, Nikon, has announced that it will stop production of most of its 35 mm film cameras to focus on digital photography products. Its traditional film-based cameras now account for less than five per cent of its UK division's sales, and an ever smaller percentage of Nikon's total sales volume. By focusing on digital SLR cameras, the company will now concentrate its resources in those business categories that continue to demonstrate the strongest growth.

Creative destruction is sometimes mistaken for corporate transformation; in fact, they are most unlike each other. Take the example of Qualcomm, developer of CDMA wireless telephony. Under the stewardship of Dr Irwin Mark Jacobs, Qualcomm had an intense, laser-like focus on CDMA - a high margin revenue stream of this $7.5 billion company.

While this has worked very well for it till recently, Qualcomm has to now evolve a broader strategy as a wireless-technology company (not just a CDMA company). That is what the new CEO Paul Jacobs (the founder's son) is focusing on. Qualcomm has not 'killed' any part of its previous business but merely expanded the definition, from a creator, patent holder and licensor of a single-technology platform to a larger, more broad-based provider of telecom solutions.

Creative destruction can be very beneficial to the economy as a whole, as it often brings with it a number of necessary innovations and transformations. It helps to promote technological advances, as businesses realise the need to adhere to technological progress and market changes, so to retain market share. It results in less efficient industrial resources being transformed into improved and more profitable ones.

But the process also has disadvantages, which are visible mainly to those who couldn't adhere to the technological changes and didn't follow the market progress. It may mean people losing jobs and entrepreneurs losing their businesses, if the company's previous performance is not useful anymore. Many of them do not disappear completely, however, but continue their activity but on a smaller scale or take up a different role.

As the Indian economy continues to grow, we will witness the maturity of many of the erstwhile and even present business leaders, forcing them to re-evaluate their business models and future areas of growth. Some business houses like Reliance have made successful additions to their portfolios, like telecom and now retail. But only time will tell who will prevail in this rapidly changing business eco-system..