The process of creative destruction is firmly associated with the economist Joseph Schumpeter (1883–1950). Many people are familiar with the concept, yet few organizations apply it systematically. Schumpeter’s main underlying idea is set out in his book Capitalism, Socialism, and Democracy: “This process of Creative Destruction is the essential fact about capitalism. It is what capitalism consists in and what every capitalist concern has got to live in.”1
Schumpeter was the first influential economist to vehemently advocate the view that a dynamic imbalance, caused by the activities of the innovator-entrepreneur, is a far more normal situation for a healthy economy than balance and optimization. Ahead of his time, in his seminal work The Theory of Economic Development, published in 1911, he drew attention to the topic of innovation, decades before it became a key issue in all business and social organizations. Today, creative destruction is more relevant than ever, and innovation and entrepreneurial activity have become major issues for all organizations. In an age of constant change the relevant criterion is not size, but strength, and above all adaptability to changing circumstances.
Electronics giant Sony is an example of an organization that has at times been too slow to acknowledge the importance of creative destruction and of the need to adapt to changing circumstances. In the 1980s the company enjoyed unbelievable success worldwide with its Walkman, the world’s first mobile cassette player. For around 20 years Sony dominated the market. Yet it failed to properly anticipate the threat posed by Apple, let alone respond by bringing to bear all the market power it could muster. In 2007 Apple reported that it had sold 100 million iPods, and the press spoke of the “Walkman of the 21st century.” In 2009, the dominance of the iTunes store was so strong that it was estimated to command an incredible 70 percent market share of the legal American music download market.2
For too long Sony clung to the belief that hardware was the key to success, while Apple, displaying creative destruction, deliberately abandoned such a credo. And with everything offered in conjunction with its iPod, from easy Internet access to a significant lifestyle statement, Apple turned a good product into an excellent one that proved popular all over the world.
In an age when the dynamic imbalance is even greater than it was in Schumpeter’s day, it is organizations that move forward by systematically innovating and achieving stability and continuity. At some stage, all rules and regulations, systems, procedures, products, and services have fulfilled their purpose, become outdated, and need to be renewed. Either that or they fail to fulfill their purpose and likewise need to be replaced.
Of course, creative destruction is not merely a useful concept in the economic domain. For instance, the composer Arnold Schoenberg (1874–1951), who developed the 12-tone technique, greatly influenced the music of the twentieth century because his music broke with tradition, prompting musicians to enter totally uncharted territory. And although Schoenberg’s achievement was subsequently deemed an important milestone in the history of music, like Gustave Eiffel, he found that his innovation was not afforded a universally warm welcome. Nonetheless, demonstrating true entrepreneurial spirit, he always believed in his work, saying in 1935: “The time will come when the ability to draw thematic material from a basic set of twelve tones will be an unconditional prerequisite for obtaining admission into the composition class of a conservatory.”3
Entrepreneurial activity may widely be deemed risky, which it undoubtedly is, yet it entails less risk than stubbornly continuing to optimize things that are no longer of use. If consumers want automobiles, any attempts by the last manufacturer of horse-drawn carriages to optimize his internal procedures and marketing will be in vain. Practicing creative destruction helps to ensure that resources are deployed where they prove most productive. Contrary to the cliché about daredevil entrepreneurs, managers who act in an entrepreneurial fashion are intent not on taking risks but on making substantial efforts to spot, avoid, and control any dangers. Entrepreneurs and managers who innovate successfully pursue opportunities rather than be audacious and take risks.
As the pace of change picks up, managers are faced with the choice of either merely reacting to changes or actively trying to shape them. Creative destruction is a key tool for innovation and entrepreneurial conduct because it questions things and opens up room for improvements. In addition, it underpins a corporate culture in which innovation and entrepreneurship are duly appreciated.
In what connection would creative destruction benefit your organization? What would you change?
Gather your best people together and discuss where you could benefit from creative destruction.
Where do you see opportunities that are associated with relatively minor risks?