What is creative destruction?
The economist Joseph Schumpeter introduced creative destruction as early as 1942. In short, it refers to the process of change that follows important technological and economic achievements.
Schumpeter distinguished between radical (disruptive) and incremental (stepwise) innovation. Radical innovation entailed the breakdown of existing structures that characterize creative destruction. This breakdown was seen as a prerequisite for new innovations and knowledge development.
Schumpeter also believed that entrepreneurs and innovation are responsible for the long-term economic development of capitalist societies. In his view, the entrepreneur was, therefore, the driving force behind innovation, not the underlying needs of the consumer.
He describes the entrepreneur’s driving forces as:
”First of all, there is a dream and the will to found a private kingdom, usually, though not necessarily, also a dynasty… Then there is the will to conquer: the impulse to fight, to prove oneself superior to others, to succeed for the sake, not of the fruits of success, but of success itself… Finally, there is the joy of creating, of getting things done, or simply of exercising one’s energy and ingenuity”.
When entrepreneurs replace existing technologies through the spread of innovation, they also destroy established companies that have built their positions on old technologies. In other words, the death of companies and industries caused by new technology is not a new phenomenon – and not really unhealthy for society either. Instead, in Schumpeter’s view, it creates the conditions for new technologies to spread and take hold more quickly.
Is the theory still relevant?
Probably yes. Richard Foster and Sarah Kaplan revived Schumpeter’s theory in their book Creative Destruction (2001), applying his theories to modern businesses, as well as today’s innovation and management principles.
They based their studies on the evolution of 1,000 companies over 36 years. The companies studied were in more than 15 industries, from the old and new economy: from paper and chemicals to semiconductors and software.
Their results showed that even the companies considered the most well-managed and respected could not keep beating the market for more than 10 to 15 years, regardless of whether they belonged to the old or new generation of companies.
Instead, they argue that companies must learn to be dynamic and responsive to change if they are to continue to perform over time and that a company’s longevity depends on how it manages to balance three management principles:
-effectively manage and run the existing day-to-day business.
-creating new business that meets customer needs
-exiting businesses that no longer meet their high standards of growth and profitability.
The big challenge in their eyes is that the innovation needed to create new, resilient businesses often clashes with the need for efficiency and productivity in existing day-to-day operations. As a result, large companies are becoming slower and slower and failing to change with the world. They thus have great difficulty in dealing with today’s and tomorrow’s challenges in parallel. Their studies show that most fail to rise to the challenge. Instead, they go under, split up, or are bought by another player.
Food for thought!
_________________________________
NB. This text is a translated extract from the book Navigera in i framtiden (Elisabet Lagerstedt, 2018). Translation from Swedish via DeepL Translate.
About the author
Elisabet Lagerstedt
Elisabet Lagerstedt is the founder and director of Future Navigators. As a trusted advisor, consultant, and Executive Coach, she helps business leaders navigate beyond business as usual to build Better Business and co-create a better future - through insight, strategy, innovation, and transformation. Elisabet is also the author of Better Business, Better Future (2022) and Navigera in i Framtiden (2018).