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On Creative Destruction

17 February, 2022 - 5 min read


Outdated product replaced by new ones due to innovation.

Creative destruction has plenty of examples: horse wagons, typewriters, newspapers, cassette tapes, compact disks, MP3 players and landlines replaced by modern technologies.

Definition

Creative destruction refers to the product and process innovation mechanism by which new production units replace outdated ones. Creative destruction is most often used to describe disruptive technologies such as the railroads or Kodak cameras being replaced by mobile phones.

Creative destruction reminds us that things will change over time and the best way to avoid is to adapt.

Deep analysis

Creative destruction is a powerful economic concept because it can explain many of the dynamics or kinetics of economical change of an organization.

History

The term was coined in the early 1940s by economist Joseph Schumpeter, who observed real-life examples of creative destruction, such as Henry Ford’s assembly line.

Schumpeter characterized creative destruction as innovations in the manufacturing process that increase productivity, describing it as the “process of industrial mutation that incessantly revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one.”

His theory assumed that long-standing arrangements and assumptions must be destroyed to free up resources and energy to be deployed for innovation.

Marx never coined the term, however, he explicitly explained the concept in The Communist Manifesto of 1848:

... a society that has conjured up such gigantic means of production and of exchange, is like the sorcerer who is no longer able to control the powers of the nether world whom he has called up by his spells. ... It is enough to mention the commercial crises that by their periodical return put the existence of the whole of bourgeois society on trial, each time more threateningly. In these crises, a great part not only of existing production, but also of previously created productive forces, are periodically destroyed.

The productive forces at the disposal of society no longer tend to further the development of the conditions of bourgeois property; on the contrary, they have become too powerful for these conditions. ... And how does the bourgeoisie get over these crises? On the one hand by enforced destruction of a mass of productive forces; on the other, by the conquest of new markets, and by the more thorough exploitation of the old ones. That is to say, by paving the way for more extensive and more destructive crises, and by diminishing the means whereby crises are prevented.

Marx in his other writings:

Again, however, from destruction a new spirit of creation arises; the scarcity of wood and the needs of everyday life... forced the discovery or invention of substitutes for wood, forced the use of coal for heating, forced the invention of coke for the production of iron.

Charles Darwin also had mentioned similar observations in Origin of Species of 1859:

...extinction of old forms is the almost inevitable consequence of the production of new forms.

Clayton Christensen

As a professor at Harvard Business School, Clayton Christensen pioneered in the late 1990s some principles and steps business managers should take to defend their franchises from newcomers.

  1. Creative destruction placed on the backs of successful companies the duty that they work to “destroy” that which has made them historically rich and great. If they did not destroy their own franchise in search of a superior replacement, some young upstart enterprise in a garage somewhere (most likely Silicon Valley) would do it for them.
  2. Innovator’s dilemma suggested that companies with established dominance all too often do not innovate sufficiently, fearing that innovations would not deliver the type of profits delivered by standard and long tried-and-true businesses that made them great.

The reason why it is so difficult for existing firms to capitalize on disruptive innovations is that their processes and their business model that make them good at the existing business actually make them bad at competing for the disruption.

To remain great you have to be willing to give up what you have and need for what you can only at best hope that you might retain.

Markets always win

When mental models are out of sync with reality, corporations lose their status by staying complacent. They don’t have much control over market. In the end, market always win!

Markets lack culture, leadership and emotion which corporations face. The market has no memory or remorse. It has no mental models. The market forces are at constant play working themselves out. Market will always welcome new entrants and kill the old.

So if market always win, then, what role can corporations play?

Beginner’s mindset

In Buddhism, the act of openness to trying new things and not carrying the burden of past assumptions is called beginner’s mind. It allows for new ideas and innovation to flourish. To avoid creative destruction, understand competition constantly dismantle the old guards. Having a beginner’s mindset is wise for corporate executives to embrace.

Knowing you have a competitive advantage is often the enemy of beginner’s mind, because doing well reduces the incentive to explore other ideas, especially when those ideas conflict with your proven strategy. — Morgan Housel

Morgan Housel has a great piece worth reading, why competitive advantages die.