“…The fundamental impulse that sets and keeps the capitalist engine in motion 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… that incessantly revolutionizes the economic structure from within, incessantly destroying the old one... It is what capitalism consists in and what every capitalist concern has got to live in.”
Joseph Schumpeter (1883–1950)
The concept of creative destruction is attributed to the Austrian-American Economist Joseph Schumpeter. What this concept basically brings out is that as the world progresses and new ideas and technologies are introduced in the business world, old products, processes and services have to make way for newer products, processes and service. The creation of these new products, processes and services not only replace the old ones, they may lead to destruction of industries that existed and thrived at one time.
This change is permanent and cannot be put back. For example, when the horse drawn wagons were replaced by the locomotive drawn railway wagons, it was a permanent change. No amount of effort to revert back would ever succeed.
This destruction is not limited to small companies or small businesses but is all encompassing. Only five of today’s hundred largest public companies were among the top hundred in 1917. Half of the top hundred of 1970 had been replaced in the rankings by 2000 (W. Michael Cox and Richard Alm).
Businesses as big as the railways or the trans-oceanic passenger liners in the nineteenth and early twentieth century are also affected. Depending on the characteristics of the new technology against which the existing technology is competing, there may be limited impact on the business or it may be destroyed completely. For example, the passenger railways and the passenger liners were both forced to compete against the passenger airliner. Because of the limitations of the airlines, short distance and high speed regular passenger trains survived, but trans-oceanic regular passenger liners became extinct.
What I want to bring out is that the success and size of a business is never an insurance against the forces of creative destruction.
But is it all bad? No way! Though the destruction of a business would affect a large set of individuals, the new businesses that are created due to the emerging technology would also create opportunities for a livelihood.
Now the question arises, what should a company which is successful and has reached the peak of its business do to survive such a creative destruction? Because creative destruction will definitely happen.
What separates companies that survive such creative destruction is their ability to identify a situation, their willingness to change and their speed of response to the changing situation.
· Ability to Identify. The companies should always keep their eyes peeled for changes happening in the world. Never be too busy in your day to day operations. The change may be happening in any sphere; technology, business process, customer preference etc. Also, the change may not happen in the industry where the company operates. It may be happening in some other industry. The internet was developed for the military but it is affecting firms operating in the retail sector.
· Willingness to Change. Companies need to overcome their inertia and the feel good factor that all will be well as it has been good for so long. Once the threat has been identified, do not take your opponent lightly even if it is just a start up. A company that is ready to change can only survive. Xerox did not take Canon seriously while it was chipping away on its market share till the time the situation became alarming.
· Speed of Response. Once the threat has been identified and there is a willingness to change, the company should act quickly and decisively to meet the new challenge.
Studebaker of USA manufactured horse drawn carriages in the late nineteenth century. The company identified the looming threat from the ‘Horseless Carriage’ or ‘Motor Car’ and got into the business of making gasoline powered cars in 1902. The company survived the change from horse drawn carriages to automobiles.
On the other hand, Kodak, despite having invented the core technology used in current digital cameras in 1975, never identified either the opportunity in or the looming threat from digital imaging leading to the company filing for bankruptcy in 2012.
It is therefore very important that companies remain alert to the threat of disruptive innovation which may lead to creative destruction. Identify the threat and act quickly and decisively. The action taken may be either a counter innovation to save own turf, or adoption of the new technology to create newer products, processes or services to maintain own competitive edge.