“…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.
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