In business, we love talking about success of big companies and game changing ideas. But companies failing and shutting down is just as important. Joseph Schumpeter called this "creative destruction." It means that for new, better businesses to rise, old ones have to fall. It is about making space for progress.
So why do companies need to fail for the economy to grow? Why do once great businesses become slow and inefficient? And can anything be done to keep them alive longer? Let us break it down.
1. Why Letting Companies Fail Helps the Economy?
Most people think growth happens when companies slowly get bigger and make more money. But Schumpeter said real growth comes from bold changes such as new inventions, better ways of doing things, and completely new industries. The growth happens when new ideas replace old ones, entrepreneurs take risks, and when old companies die. If bad companies don’t fail, they keep using up resources (like money and talent) that could be helping better businesses grow. Some weak companies keep going for years, barely surviving and these are called "zombie companies." They don’t help the economy, they just slow it down.
2. Why Do Good Companies Become Bad?
Even the best companies can become slow, outdated, and inefficient. When companies get big, they add more managers, more meetings, and more paperwork. Decisions take forever. New ideas get stuck in approval processes. The company stops taking risks and falls behind. Some companies succeed because of one great idea, but then they refuse to change. Kodak invented the digital camera but stuck to film because it was their main business. Blockbuster ignored streaming because they made money from DVD rentals. What worked yesterday might not work tomorrow.
Young companies grow fast because they are trying new things. But older companies often run out of good ways to grow. Instead of innovating, they waste money on buying other companies just to look bigger, giving money back to shareholders instead of improving the business, and sticking to old products that people don’t want anymore. Without fresh ideas, they slowly fade away.
3. Can We Save Failing Companies?
No company lasts forever, but some can stay strong longer by making smart changes by not spending money on things that don't help the business, selling parts of the company that are not working, and focusing on what still makes money. Big companies can act like startups by letting small teams try new things without too much control, rewarding employees for creative solutions, and partnering with or buying innovative smaller companies. Some governments try to save failing companies with bailouts. But that just keeps weak businesses alive longer than they should be. Better policies would make it easier for new companies to start, help workers learn new skills when their industry changes, and let bad companies fail so better ones can take their place.
The bottom line is that change is necessary as no company can stay on top forever. The best ones adapt, but even they will eventually be replaced by something newer and better. Some companies manage their decline well such as IBM moving from computers to AI. Others spin off successful parts such as PayPal splitting from eBay. But in the end, the economy grows when old businesses make way for new ones.
That’s not a bad thing. It’s how progress works.
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