“Creative destruction” is the constant economic upheaval that defines capitalism. When economist Joseph Schumpeter first wrote about it in the 1940s, he described it as a process that “revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one.”
The past few weeks in Wisconsin have put the theory of creative destruction through a harsh reality check.
The announcements that Oscar Mayer would close its headquarters in Madison and that Joy Global would continue its layoffs in Milwaukee illustrated how changes are rippling through two legacy industries, food processing and mining equipment.
In fact, total Wisconsin layoffs announced in 2015 already exceed the 2014 total.
Read the full commentary in the Milwaukee Journal Sentinel here.
As older industries evolve, consolidate or even die, younger companies and sectors emerge. This economic evolution is often disruptive for workers and shareholders in mature companies, yet promising for young companies on the rise.
Companies don’t live as long as they once did. The average life span of a company listed in the S&P 500 index of leading U.S. companies has dropped by more than 50 years in the last century, from 67 years in the 1920s to 15 years today, according to Richard Foster, a Yale University professor and an emeritus director of McKinsey & Co.
Fowler has estimated that by 2020 more than three-quarters of the S&P 500 will be made up of companies virtually unknown to us today.
Here’s a close-to-home example: In 1896, General Electric was one of the 12 original firms on the newly formed Dow Jones industrial average.
Today, the company — which maintains a strong health care presence in Wisconsin — is the only one of the 12 still listed on the index.
Coming off a week in which the leading Republican candidates for president visited Milwaukee, a city with an economy in transition, the notion of creative destruction in the marketplace is more than theory.
It is painful reality for those who will lose their jobs — and it demonstrates why creation of new companies is so vital to workers and the economy.
A report released this summer by the Ewing Marion Kauffman Foundation in Kansas City, Mo., ranked Wisconsin 50th among the 50 states in company creation.
There are plausible explanations for the Kauffman numbers, but the fact remains that Wisconsin must do more to foster start-ups.
That’s already happening in some ways, especially in the state’s technology sectors. The Milken Institute’s State Science and Tech Index, to cite one prominent report, ranked Wisconsin 38th in 2010, 24th in 2012 and 18th in 2014 in the net formation of high-tech businesses per 10,000 businesses.
Because the vast majority of net new jobs in the United States are created by new companies, all start-ups are important. Just as vital is the business “survival rate” for those young firms.
There is evidence that Wisconsin does a better job of keeping young companies alive once they start.
The U.S. Small Business Administration reported in mid-2014 that Wisconsin has a 10-year new business survival rate of 41%, the highest survival rate in the Midwest and 6.5 percentage points ahead of the U.S. average.
Explanations for Wisconsin’s relatively good showing range from Midwestern stubbornness and frugalness to better-educated workers to the growth of programs that connect, mentor and help finance young companies.
Speaking Nov. 5 at the Wisconsin Early Stage Symposium, Gov. Scott Walker cited Wisconsin’s high business survival rate and credited programs such as the state’s Qualified New Business Venture program and its related investor tax credits, state matching grants for recipients of federal Small Business Innovation Research grants and other hands-on efforts to mentor young companies.
Why are such programs important?
According to the Dun & Bradstreet Business Failure index, 92% of business deaths are due to a lack of financial management or marketing skills and knowledge.
Examples of start-ups that survive and grow can be instructive to others. Also at the Early Stage Symposium, Zach Halmstad of JAMF Software described how his Eau Claire firm grew from two unpaid college buddies to 500 employees in Wisconsin and seven other offices.
“Wisconsin is an ideal place for start-ups to happen,” Halmstad said, because costs are low compared to historic technology hubs such as California’s Silicon Valley and high-quality talent is available through the state’s colleges and universities.
“We found really good people in Eau Claire,” Halmstad added, and kept them through a corporate culture that rewards workers at all levels. The retention rate of JAMF Software employees is about 95% over time.
Shorter life spans for mature companies means many young companies must take their places in the economic pipeline.
Wisconsin needs more start-ups — as well as a continued effort to keep those companies alive and growing.