Why do some companies thrive while others dive? The answer lies in a company’s attitude toward change.

Capitalism is never stationary, observed Austrian economist Joseph A. Schumpeter nearly 60 years ago. It is evolutionary, even revolutionary.

"The fundamental impulse that sets and keeps the capitalist engine in motion," he said, "comes from the new consumers’ goods, the new methods of production or transportation, the new markets, the new forms of industrial organization that capitalist enterprise creates."

The price of progress is obsolescence – or what Schumpeter called "the perennial gale of creative destruction" that "incessantly revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one."

Companies and capitalism are, in a sense, at odds. An established company’s primary aim is to stay in business, yet the forces of a market economy drive in the opposite direction, encouraging the substitution of the old by the new.

The traditional corporate emphasis on continuity and self-perpetuation promotes static thinking, which is poison to the process of internal overhaul so vital to a company’s survival and prosperity.

Managers must make innovation the centerpiece of their business philosophy and restore the entrepreneurial spirit that sparked their companies in the first place.

The following seven suggestions, all aimed at making a company an agent of change rather than a casualty of it, are useful.

Break out of the box: Business growth requires questioning the status quo and cleverly turning consumers into customers. In the Internet culture, where loyalty-building referral services are profitable, this may not always entail stepped-up marketing efforts or new products. It does entail answering the question: What do people really want and need?

Tap the intellectual capital within your company: Employees are more than labor; they’re a font of intellectual capital, as valuable and versatile as financial capital.

Today, executives can modernize the age-old suggestion box by using an Intranet or Internet web site, e-mail, an 800 number or other forums designed to inspire the free flow of ideas.

A few years ago, I convened such a forum where a clerk asked a simple question: What happened to customers who left without receiving adequate service? They went elsewhere, of course.

But by taking that simple question a few steps further, we spawned a whole new business, contributing to a more than 10-fold increase in our pre-tax earnings in just six years.

Rationalize costs on a continuous basis: Headline-making downsizings have become endemic. But their expected savings are frequently fleeting.

A sounder approach for companies is to factor in savings as a standard budget item, equivalent to 10% to 20% of anticipated net. An ongoing process of rationalization avoids the problems of one-shot traumatic disruption, the loss of intellectual capital and damaged morale.

Reinvest a set percentage of cost savings: Any farmer will tell you, "Don’t eat the seed corn." Yet blinkered managers do that in pursuit of profit enhancement.

The prudent course is to divvy up the gains from rationalization, with half dropping to the bottom line and half used for reinvestment. This automatically creates a budget for innovative testing.

Look for the silver lining: Inevitable business setbacks are disguised opportunities.

Viagra, for example, was a recycled R&D experiment by Pfizer Inc. The Williams oil and gas transmission company of Tulsa founded a long-distance telephone business by running fiber-optic cable through its decommissioned pipelines. Japan Railways East struck water while boring a new high-speed tunnel, resulting in a bottled mineral water from Mount Tanigawa.

Construct stabilizing elements: In a volatile environment, event the most adaptive company can be sidetracked. Like a boat’s keel, a clear mission statement can pilot a company through the roughest waters.

Remove the fear of failure: Earlier this century, AT&T was effectively run by the company’s comptroller, who kept one rigid rule: Don’t promote anyone who hadn’t failed at least once. Anyone who had never failed never tried, he reasoned. Indeed, the best breakthroughs often come from breakdowns.

In short, a company that pursues creative destruction – transforming the old into new – will thrive on change.

To do otherwise is perilous, as Peter F. Drucker warns: "An enterprise, whether a business or another institution, that does not innovate and does not engage in entrepreneurship will not survive long."

Reprinted by permission of Investor's Business Daily, For People Who Choose To Succeed © Copyright 1999.